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    Question

    If the marginal propensity to save is 0.3 and the marginal propensity to import is 0.1, and the government increases expenditures by Rs. 10 billion, ignoring foreign-income repercussions, by how much will GDP rise?

    A Rs. 15 billion Correct Answer Incorrect Answer
    B Rs. 10 billion Correct Answer Incorrect Answer
    C Rs. 20 billion Correct Answer Incorrect Answer
    D Rs. 25 billion Correct Answer Incorrect Answer

    Solution

    Multiplier = 1/(1-c+m) = 1/(1-0.7+0.1) = 1/0.4 = 2.5 Change in GDP = 2.5 Change in G = 2.5 (10) = 25

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