Question

Assume that the multiplier in a country is equal to $4$and that autonomous real consumption spending is$\backslash (1$trillion. If current real GDP is$\backslash )18$trillion, what is the current value of real consumption spending?

Short answer

The true cost of spending is trillions of $14.5$dollars.

Step-by-step solution

Calculation for consumption function 

The consumption function that is assumed is indicated by,

$\mathrm{C}=\mathrm{c}+\mathrm{b}\mathrm{Y}$

where the self-directed spending$\mathrm{c}$is $\$1$trillion.

Because the multiplier is$4$,

So,

$4=\frac{1}{1-\mathrm{MPC}}$

$4=\frac{1}{1-\mathrm{b}}$

$\mathrm{b}=0.75$

Consumption function $\mathrm{C}=1+0.75\mathrm{Y}$

Calculation of real value

If the current rate of growth in real GDP is maintained as$\$18$trillion,

The current real value of consumer spending is:

$\mathrm{C}=1+0.75\mathrm{Y}$

$\mathrm{C}=1+0.75\times 18$

$\mathrm{C}=14.5$