The MPC is .89 and the government has cut spending by $4 billion. Using the simple multiplier how does this cut affect the real GDP?
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In order to understand what impact this action has on gross domestic product (GDP), we must first determine what the multiplier is in this situation. The formula for the multiplier is
Spending multiplier = 1/(1-MPC).
Since you have given us the MPC (marginal propensity to consume), we can calculate the multiplier. Using the figure given for MPC, we have the equation
Spending multiplier =...
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