(g)
(i) Calculate the maximum possible increase in GDP that could result from the rise in investment.
Multiplier = 1/1-MPC
Marginal Propensity to Consume = the proportion of additional income used for consumption
MPC = .8
So 1/1-.8 = 1/. 2 = 5 is the Multiplier
Investment increases by 2b x 5 = 10b increase in GDP
(ii) Country Delta is an open economy with a government sector. Investment rises by $2 billion in both Delta and Beta. Explain how the size of the multiplier and the resulting effect on GDP might be different in the two countries.
Beta is a closed economy with no government sector
Delta is an open economy with a government sector and has more leakages
as (imports & income taxes) occur in economies with open sectors with a government
An increase in investment will increase RGDP by smaller amounts as a greater proportion is withdrawn before additional spending takes place.
The effect on RGDP in Delta will be smaller than in Beta.
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