How to Calculate the Expected Increase in GDP from Stimulus Checks

Question:

If the government provides $100 billion in stimulus checks to people with a Marginal Propensity to Consume of 0.8, what would be the total expected increase in GDP?

Answer:

The expected increase in GDP from the $100 billion stimulus checks, assuming no taxes or international trade, is $500 billion.

In order to calculate the expected increase in GDP from the stimulus checks, we can utilize the formula:

Expected increase in GDP = Stimulus checks amount / (1 - MPC)

Substitute the given values into the formula:

Stimulus checks amount = $100 billion

Marginal Propensity to Consume (MPC) = 0.8

Now, plug these values into the formula:

Expected increase in GDP = $100 billion / (1 - 0.8)

Simplify the equation:

Expected increase in GDP = $100 billion / 0.2

Calculate the result:

Expected increase in GDP = $500 billion

Therefore, the expected increase in GDP as a result of the $100 billion stimulus checks, assuming no taxes or international trade, is $500 billion.

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