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Assume that the MPC is 0.8. If government purchases increase by $500, by how much does...

Assume that the MPC is 0.8. If government purchases increase by $500, by how much does GDP increase in equilibrium? Answer in units of dollars (so if the answer is $1,000, input 1000).

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Answer #1

If the government changes tax rate, MOC is used in calculating the change in GDP.

Here, the government expenditure increases by $500, leading to an increase in the GDP by $500.

The correct option is therefore

500.

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