Troll island is a small island nation that recently experienced an autonomous change in aggregate expenditures (ae). ae increased by 3 billion, and the marginal propensity to consume on troll island is equal to 0.65 . what is the change in troll island's real gdp after the increase in ae? enter your answer in billions of dollars, rounded to one place after the decimal. for example, an answer of $2,500,000 should be entered as 2.5.

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:

According to the statement the MPC = 0.65, therefore the multiplier is:

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: