An economy has a marginal propensity to consume of 0.6, real GDP equals $500 billion, and the government collects 20% of GDP in taxes. If government purchases increase by $10 billion, show the rounds of increased spending that take place by completing the accompanying table. The first and second rows are filled in for you. In the first row, the increase in government purchases of $10 billion raises real GDP by $10 billion, taxes increase by $2 billion, and YD increases by $8 billion; in the second row, the increase in YD of $8 billion increases consumer spending by $4.80 billion (MPC change in disposable income).

Changei Rounds Changei nrealG Changei Changei nGorC DP ntaxes YD (billions of dollars) AG=$1 1 aan St | s10.00 | $2.00 | $8.00 2 ees 4.80 0.96 3.84, 3 ? ? ?

4 2 2 2 5 ? ? ?

6 ? 2 2 7 2 ? ?

8 ? 2 2 9 2 ? ?

10 2 2 2

a. What is the total change in real GDP after the 10 rounds? What is the value of the multiplier? What would you expect the total change in real GDP to be, based on the multiplier formula? How do your two answers compare?

b. Redo the accompanying table, assuming the marginal propensity to consume is 0.75 and the government collects 10% of the rise in real GDP in taxes. What is the total change in real GDP after 10 rounds? What is the value of the multiplier?

How do your two answers compare?