Troll island is a small island nation that recently experienced an autonomous change in aggregate expenditures (ae). ae increased by 2 billion, and the marginal propensity to consume on troll island is equal to 0.6. what is the change in troll island\'s real gdp after the increase in ae

The change in Troll’s Island real gdp after the increase in ae is 5 billion

Explanation:

In this question, we are asked to calculate the change in Troll’s Island GDP, given that its aggregate expenditure increased by 2 billion and the marginal propensity to consume MPC on Troll Island is 0.6

Firstly, to compute this, we need to calculate the multiplier.

Mathematically,

Multiplier = 1/(1-mpc) or 1/mps

Where mps is marginal propensity to save which is 1-mpc = 1-0.6 = 0.4

Multiplier = 1/0.4 = 2.5

Now, we proceed to calculate the change in GDP

Mathematically, this is equal to multiplier * change in aggregate expenditures = 2.5 * 2 billion = 5 billion

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