However, on the right side of the table, the $10 billion reduction in transfers has no effect on real GDP in round 1 but does lower YD by $10 billion, resulting in a decrease in consumer spending of $6 billion in round 2.

Decrease in G  $10 billion Decrease in TR  $10 billion Billions of dollars Billions of dollars Rounds Change in G or C Change in real GDP Change in YD Change in TR or C Change in real GDP Change in YD 1 ΔG = −$10.00 −$10.00 −$10.00 ΔTR = −$10.00 $0.00 −$10.00 2 ΔC = −6.00 −6.00 −6.00 ΔC = −6.00 −6.00 −6.00 3 ΔC = ? ? ? ΔC = ? ? ?
4 ΔC = ? ? ? ΔC = ? ? ?
5 ΔC = ? ? ? ΔC = ? ? ?
6 ΔC = ? ? ? ΔC = ? ? ?
7 ΔC = ? ? ? ΔC = ? ? ?
8 ΔC = ? ? ? ΔC = ? ? ?
9 ΔC = ? ? ? ΔC = ? ? ?
10 ΔC = ? ? ? ΔC = ? ? ?

a. When government purchases decrease by $10 billion, what is the sum of the changes in real GDP after the 10 rounds?

b. When the government reduces transfers by $10 billion, what is the sum of the changes in real GDP after the 10 rounds?

c. Using the formula for the multiplier for changes in government purchases and for changes in transfers, calculate the total change in real GDP due to the $10 billion decrease in government purchases and the $10 billion reduction in transfers. What explains the difference? (Hint: The multiplier for government purchases of goods and services is 1/(1 − MPC). But since each $1 change in government transfers only leads to an initial change in real GDP of MPC × $1, the multiplier for government transfers is MPC/(1 − MPC).)