If an economy spends 90% 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) $1.0 billion.
B) $1.9 billion.
C) $10 billion.
D) $100 billion.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 0.9, so the multiplier is 1/(1-MPC) = 1/0.1 = 10. Therefore, an increase in autonomous investment of $1 billion results in an increase in equilibrium real GDP of $10 billion.

If an Economy Spends 90% of Any Increase in Real