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Businesses in the nation of Islandia have been accumulating cash because they have a pessimistic outlook of the national economy. Due to recent changes in the economic outlook of Islandia, business leaders have started investing some of their accumulated cash. Instructions: Enter your answers as a whole number. Use a positive number to show an increase and a negative number to show a decrease. a. If business leaders invest a total of $30 billion of accumulated cash, what is the maximum expected change in GDP if Islandia's marginal propensity to consume is 0.8

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abiolataiwo2015

The maximum expected change in GDP if Islandia's marginal propensity to consume (MPC) is 0.8 is: $150 billion.

Maximum expected change in GDP

First step is to find the Multiplier

Multiplier= 1/(1 − MPC)

Multiplier = 1/(1 − 0.80)

Multiplier= 1/0.20

Multiplier=5

Second step

Maximum expected change = 5 × $30 billion

Maximum expected change = $150 billion

Inconclusion the maximum expected change in GDP if Islandia's marginal propensity to consume (MPC) is 0.8 is: $150 billion.

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