Government Spending on PPE and the Increase in GDP
What is the total amount of expected increase in GDP resulting from the government spending $100 million on PPE with a Marginal Propensity to Consume of 0.8?
The total increase in GDP would be $500 million. In this scenario, the Government spending on PPE can be seen as an injection into the economy. The Marginal Propensity to Consume (MPC) of 0.8 means that 80% of the additional income generated will be spent, leading to further rounds of spending and income generation.
The Multiplier Effect
Multiplier = 1 / (1 - MPC)
Substituting the given Marginal Propensity to Consume (MPC) value of 0.8 into the formula, we get:
Multiplier = 1 / (1 - 0.8) = 1 / 0.2 = 5
This means that for every dollar of government spending on PPE, the total increase in GDP will be 5 times that amount. Therefore, the total increase in GDP resulting from the $100 million spending on PPE would be:
5 x $100 million = $500 million
This demonstrates the impact of government spending as an injection into the economy, leading to a multiplied effect on GDP through increased consumption and economic activity.