8 Connect Problem CP 1113 algo 1375 points Suppose that the

8 Connect Problem CP 11-13 (algo) 13.75 points Suppose that the real GDP of a country is in equilibrium at $350 billion. Now suppose that planned investment decreases by billion, and that this decrease causes real GDP to shift to a new equilibrium level of $330 billion. 030525Instructions: In part a, round your answer to 1 decimal place. In part b, round your answer to 2 decimal places. a. What is the spending multiplier for this country? 5 b. What is the marginal propensity to save (MPS) for this country?

Solution

If planned investment decreases by $4billion then real GDP decreases by 20billion which implies spending multiplier=20/4=5

Spending multiplier=change in real GDP/change in Investment spending

And we also know multiplier=1/1-mpc=1/mps=5

Thus MPS=1/multiplier=1/5=0.2

Thus MPC=0.8 and marginal propensity to save is 0.2

Ans is 0.2