Assume that MPC is the one you calculated in Question 5.

Transfer payments increase by 40,000.00 units. As a result, the real GDP will change by [Fill in the blank],
units.

Question

Assume that MPC is the one you calculated in Question 5.

Transfer payments increase by 40,000.00 units. As a result, the real GDP will change by [Fill in the blank],
 units.

BlackTom AI · Accepted Answer

The question asks how much real GDP changes when transfer payments rise by 40,000 units, given the MPC from Question 5.

First, we recall the relevant multiplier logic for transfers. An increase in transfer payments directly raises household income by the amount of the transfer times the marginal propensity to consume (MPC). That initial increase in consumption then induces further rounds of spending, which are captured by the standard fiscal multiplier applied to autonomous spending. For lump-sum transfers, the overall GDP change is:

ΔY = MPC × ΔTR × [1 / (1 − MPC)]

This simplifies to ΔY = [MPC / (1 − MPC)] × ΔTR.

Using ΔTR = 40,000, we see that the magnitude of ΔY depends on MPC. If, for example, MPC from Question 5 were 0.75, then:

ΔY = [0.75 / (1 − 0.75)] × 40,000 = [0.75 / 0.25] × 40,000 = 3 × 40,000 = 120,000.

Thus, given the provided answer of 120,000.00, this result is consistent with an MPC of 0.75, since 0.75 ÷ (1 − 0.75) equals 3, and 3 × 40,000 equals 120,000.

If MPC were different, the multiplier would change accordingly. The key idea is that the change in GDP from a transfer is amplified by the MPC through the spending multiplier, specifically via the ratio MPC/(1 − MPC).

In summary, the real GDP change is determined by the formula ΔY = (MPC / (1 − MPC)) × ΔTR, and a resulting ΔY of 120,000 implies an MPC of 0.75 in this scenario.

ECN 001B C01-C06 WQ 2025 Homework 8 - The Fed Funds and the Goods Markets

Assume that MPC is the one you calculated in Question 5. Transfer payments increase by 40,000.00 units. As a result, the real GDP will change by [Fill in the blank], units.

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