Question

Recall that the Keynesian spending multiplier equals 1 /(1-MPC). Suppose that in panel (a) of Figure 13-1, the government determined that the amount by which the AD curve had to be shifted directly rightward from the point E1 was equal to \(1.0 trillion. If the government decided that a \)0.2 trillion increase in real government spending was required to generate this shift, what must be the value of the MPC?

Short answer

The value of MPC is$0.8$

Step-by-step solution

introduction

Marginal Propensity to Consume alludes to the extent of the absolute expansion in discretionary cash flow that families give to utilization.

Spending Multiplier is a proportion of the degree to which GDP changes because of an adjustment of arranged venture spending or government spending.

explanation 

Increase in government expenditure = $∆G$=$\$0.2$trillion

The rightward shift in the curve AD = role="math" localid="1651934939049" $∆AD$=$\$1$trillion

Spending multiplier is calculated as,

$\begin{array}{r}=\frac{\mathrm{\Delta AD}}{\mathrm{\Delta G}}\\ =\frac{\text{1}}{0.2}=5\end{array}$

Now MPC is calculated,

$\text{Spending multiplier×}(1-\mathrm{MPC})=1$

$\begin{array}{r}5-5\mathrm{MPC}=1\\ -5\times \mathrm{MPC}=-4\end{array}$

MPC = $0.8$