Consider a simple macro model with demand- determined output. Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks?
A)MPC = 0.7, t = 0.1, m = 0.4
B)MPC = 0.8, t = 0.2, m = 0.3
C)MPC = 0.8, t = 0.1, m = 0.2
D)MPC = 0.7, t = 0.3, m = 0.2
E)MPC = 0.9, t = 0.2, m = 0.4

Question

Quizplus · Accepted Answer

The largest fluctuations in real GDP occur when the marginal propensity to consume (MPC) is high and the tax rate (t) and marginal propensity to import (m) are low. Option C has a high MPC of 0.8 and the lowest combined t and m values, leading to a larger multiplier effect.

Consider a Simple Macro Model with Demand- Determined Output