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Answer :
$25 trillion. The total impact on GDP from an expansionary fiscal policy involving a $3 trillion increase in transfer payments and a $2 trillion increase in government purchases, given a marginal propensity to consume (MPC) of 0.8, can be calculated using the fiscal multiplier formula.
The fiscal multiplier is the reciprocal of (1 - MPC), which in this case would be 1 / (1 - 0.8) = 5.
Therefore, the total increase in GDP is the sum of the direct increases in spending multiplied by the fiscal multiplier.
The increase in transfer payments will increase consumption due to the households' tendency to spend a portion of the received money, as represented by the MPC.
Consequently, the increase in government purchases will directly impact GDP.
The total impact on GDP would be calculated as the sum of the increases in transfer payments and government purchases multiplied by the fiscal multiplier:
Total impact on GDP = Multiplier × (Increase in transfer payments (GT) + Increase in government purchases (G))
Total impact on GDP = 5 × ($3 trillion + $2 trillion) = $25 trillion
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