Answer:
8.6 billion
Explanation:
The best way to solve this exercise is to understand the theoretical relationships that exist between the concepts.
Let us start with the most important one: The marginal propensity to consume, defined as that proportion of the increase in income that the consumer allocates to the consumption of goods and services, rather than saving it. Mathematically, it is described as the change in consumption divided by the change in income.
A higher marginal propensity to consume means that there is more spending in the economy, which in turn increases the GDP. Therefore, in order to understand changes in GDP we must to apply the understand the marginal propensity to consume.
However, this concept alone does not tell us how much GDP will increase, for this we must resort to the concept of multiplier effect, which is defined as:
[tex]Multiplier = \frac{1}{1-MPC}[/tex]
According to the statement the MPC = 0.65, therefore the multiplier is:
[tex]Multiplier = \frac{1}{1-0.65}[/tex]
[tex]Multiplier = 2.8571[/tex]
Consider the multiplier as the lever that drives economic growth. We already know the capacity of that lever (2.8571), now to know exactly how much GDP will change thanks to its actions, what we do is multiply it by the increase in aggregate expenditures (3 billion).
Therefore:
[tex]GDP change= 2.8571 * 3[/tex]
[tex]GDPchange=$8.6 billion.[/tex]
Based on the change in aggregate expenditure and the marginal propensity to consume, the change in real GDP in Troll Island will be $8.57 billion.
This can be found by the formula:
= Change in spending x Multiplier
Multiplier is:
= 1 / (1 - MPC)
= 1 / ( 1 - 0.65)
= 2.857
The change in spending is:
= 3 billion x 2.857
= $8.57 billion
Find out more on marginal propensity to consume at https://brainly.com/question/17930875.
