GDP=500

Question

Government spending decreases by 20
Taxes increase by 20
Investment decreases by 20
MPC=.8
What is the new equilibrium GDP?

Answer 1

The new equilibrium GDP would be 460. The equation for calculating the new equilibrium GDP is GDP = Government Spending + Investment + Taxes x MPC. Therefore, the new equilibrium GDP would be 500 - 20 - 20 + 20 x 0.8 = 460.