The explanations in the book don't seem to match how these problems are set up, and I am stumped! I need formulas written in numbers, not lengthy wording. Please help!

1) If the GDP in 1999 were $800 and the GDP deflator was 125%, 1987=100%, what is the real GDP and base year?

2) Assume the MPC is 2/3. If gross investment spending increases by $2 million, the level of the GDP will change by how much?

3) What effect will a tax cut of $20 billion have on the GDP if the MPC is 0.9?

4) If government spending and taxation both increase by $5 billion, what will be the effect on the GDP?

Thanks for your help.

Solution Preview

1) If the GDP in 1999 were $800 and the GDP deflator was 125%, 1987=100%, what is the real GDP and base year?

since the GDP deflator of 1987=100%, then year 1987 is the base year
Then 1999 real GDP = GDP / deflator = 800 / 125% = $640

2) Assume the MPC is 2/3. If gross investment spending increases ...

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