## Answers

Answer 4

Multiplier = 1 ÷ (1 – MPC)

= 1 / (1 - 0.9) = **10**

Answer 5

**A)** For this part of the problem, we're given that the change or increase in investment is $8 billion and that the marginal propensity to consume (MPC) is 0.75 (3/4).

When performing calculations that involve the gross domestic product, we can use the GDP equation:

*Y* = *C* + *I* + *G* + *NX*

Here, **Y* is the GDP that is dependent upon:

- Consumption (
*C*) - Investment (
*I*) - Government spending (
*G*) - Net exports (
*NX*)

This equation plays an important role in solving the given problem because we have to calculate the GDP.

The multiplier is given by 1 / (1 - MPC).

So:

Change in *Y* = 1 / (1 - MPC) * change in investment (*I*)

Change in *Y* = 1 / {1 - (3/4)} * 8

Change in *Y* = 4 * 8

Change in *Y* = 32 billion

Thus, this $32 billion will be equal to income.

**B)** Now, if the MPC is 0.80 (4/5), the change in the GDP is given by:

We have to calculate the change in GDP when the marginal propensity to consume (MPC) is 4/5.

We have that the change in the investment is $8 billion.

Change in *Y* = 1 / (1 - MPC) * change in investment (*I*)

Change in *Y* = 1 / {1 - (4/5)} * 8

Change in *Y* = 5 * 8

Change in *Y* = $40 billion

Thus, the change in GDP = $40 billion.

Answer 6

a. I - Increase in price level causes Aggregate demand to increase

b. D - As the interest rates rises investment falls so there would be leftward shift of AD

d. I - Increase in consumption causes to shift AD to the right

.