If the economy spends 80% of any increase in real GDP, then an increase in autonomous investment of $1 billion would result ultimately in an increase in equilibrium real GDP of
A) $0.8 billion.
B) $1.0 billion.
C) $1.8 billion.
D) $5.0 billion.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Here, MPC is 0.8, so the multiplier is 1/(1-0.8) = 5. Therefore, an increase in autonomous investment of $1 billion would increase equilibrium real GDP by $1 billion * 5 = $5 billion.

If the Economy Spends 80% of Any Increase in Real