What is the eventual effect on real gdp if the government increases its purchases of goods and services by $80,000? assume the marginal propensity to consume (mpc) is 0.75. $ what is the eventual effect on real gdp if the government, instead of changing its spending, increases transfers by $80,000? assume the mpc has not changed. $ an increase in government transfers or taxes, as opposed to an increase in government purchases of goods and services, will result in an identical eventual effect on real gdp. a smaller eventual effect on real gdp. a larger eventual effect on real gdp. no change to real gdp.

Given that,

(a) Government purchases increases by $80,000

Marginal propensity to consume (MPC) = 0.75

                        = 4 × 80,000

                        = $320,000

Therefore, Real GDP increases by $320,000.

(b) If transfers increases by $80,000

MPC = 0.75 (MPC doesn't change)

                        = 3 × 80,000

                        = $240,000

Therefore, total change in real GDP is $240,000. So, real GDP increases by $240,000.

(c) It is totally clear from the above calculations that an increase in the government transfers or taxes, as opposed to an increase in government purchases will result in a smaller eventual effect on real GDP.

Change in real GDP occur due to increase in government transfers = $240,000

Change in real GDP occur due to increase in government purchases = $320,000

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