If government purchases decrease by $10 billion with other factors held constant, calculate the change in the level of real GDP demanded when the MPC is .9.

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Gross domestic product (GDP) describes an economy's total demand. Government spending directly correlates with the direction of GDP demand. When government spending increases, real GDP demand increases, and when government spending decreases, real GDP demand decreases. In this question, government spending on purchases decreases. We consequently know that the change in the level of real GDP (RGDP) will show a correlational decrease. The expenditure multiplier is required because the change in total demand is the result of a decrease in government spending. In contrast, when a change in total demand is because of a change in government taxes, then the tax multiplier is required. The expenditure multiplier is the quotient of 1 divided by (1-MPC).

We know the MPC (marginal propensity to consume) is 0.9, so the expenditure multiplier (also called spending multiplier) is 1/(1-0.9) = 10.0. When the MPC is 0.9 and the expenditure multiplier is 10, decreases in purchases made by the government...

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