Due to the post pandemic changing scenario there is an economic slowdown, and the

only solution is to boost the economy by infusion. The federal government decided to
infuse $ 400000 into the economy for a period of time and see the rolling effect.

Calculate the multiplier effect and find out the real GDP change if the multiple
propensities to consume is 0.6?

SOLUTION

The marginal propensity to consume (MPC) is equal to ΔC / ΔY. Where ΔY is the change
in income and ΔC is the change in consumption (The Investopedia Team, 2022).
MC = 0.6
The formula to estimate the multiplier is 1/(1 – MPC). So, plug the value of MPC into the
multiplier equation and solve as follows:

Multiplier = 1/(1 – MPC)

= 1/(1 – 0.6)
= 1/0.4
= 2.5

This would mean a 2.5-fold increase in voluntary government spending in the economy,
with net change in the economy's real GDP (Study Smarter, undated).
Therefore, the final change in real GDP can be estimated as follows:

Final change in real GDP = voluntary spending x multiplier

= $400,000 x 2.5
= $1,000,000

So the net change in real GDP is $1,000,000.

The multiplier effect can be determined as the additional change in real GDP caused by
the first $400,000 increase in government spending (Wallstreetmojo Team, 2022).

Therefore, the synergistic effect can be estimated as

Multiplier Effect = Ultimate Change in Real GDP - Voluntary Spending
= $1,000,000 - $400,000
= $600,000

So the multiplier effect is $600,000 and the net change in real GDP is $1,000,000.
Reference:

Study Smarter . (n.d.). Calculating real GDP. StudySmarter UK. Retrieved

from https://www.studysmarter.co.uk/explanations/macroeconomics/nationalinco
me/calculating-real-gdp/

The Investopedia Team. (2022, September 13). Marginal propensity to consume (MPC) in
economics, with formula. Investopedia. Retrieved
from https://www.investopedia.com/terms/m/marginalpropensitytoconsume.asp#
:~:text=The%20marginal%20propensity%20to%20consume%20is%20equal%20to
%20%CE%94C%20%2F%20%CE%94Y,to%200.8%20%2F%201%20%3D%200.8.

Wallstreetmojo Team. (2022, July 6). Multiplier formula. WallStreetMojo. Retrieved

from https://www.wallstreetmojo.com/multiplier-formula/4