Calculating real GDP change?

Question

Suppose the MPC = .80 and that it is the same at all REal GDP levels. Suppose autonomous consumption decreases by %500. How much does Real GDP change?

Suppose the MPS = .1 and that it is the same at all Real GDP levels. Suppose autonomous invesment increases by $100. How much does Real GDP change.

Answer 1

part a. . . if mpc is .8 then mps = .2 then multiplier is 1/mps (assuming two sector economy)   i.e. the value of multiplier is 1/0.2 hence multiplier =5  so a  $ 500 decrease in Consumption will reduce the real GDP by 500 * 5 = 2500

as the change in gdp = change in expenditure * multiplier

part b.  . . again if MPS = 0.1 then multiplier is 1/mps i.e. 1/0.1  so multiplier = 10 now an increase in investment by $100 will raise gdp by

100* 10 = $ 1000

as again the change in gdp = change in expenditure * multiplier

the expenditure in two sector is     C+I

Answer 2

A)

Depends where this ex-consumption will go to. If on import then GDP may fall, if on Investment then possibly no change (or small reduction) in short-run but increase in GDP in long-run. If redistributes somehow between components of a system then net effect should be calculated.

For case if this reduction of autonomous consumption will just "disappear" then for simplest Keynesian cross model consumption function will shift parallel downward for autonomous consumption change:

Multiplier will be:

ΔY/ΔC = 1 / (1-MPC)= 1/0.2 = 5

If aut. consumption decreases by 500% then C0 falls from 100% to -400% so becomes negative ( for instance from 100 to -400) - it means that actually housholds produce goods instead consuming.

Where:

C0 - autonomous consumption

ΔC= - 4*C0

ΔY= 5 * (- 4*C0) = - 20*C0

Answer: GDP will fall for "- 20*C0"

B)

The same approach: autonomous investment simply "disappears" (so no redistribution).

Multiplier= ΔY/ΔI = 1 / MPS= 1/0.1 = 10

ΔI = +100$

ΔY = 10* 100$ = + 1'000 $

Answer 3

You need to specify what model you are using. Give the formulas, assumptions, and the parameters before anyone can answer that question.