An economy saves 20 percent of any increase in income and there are no income taxes or imports. Then, an increase in investment of $2 billion leads to a short run increase in real GDP of

Question

Quizplus · Accepted Answer

The marginal propensity to save is 0.2, so the marginal propensity to consume is 0.8. The multiplier is 1/(1-0.8) = 5. Therefore, an increase in investment of $2 billion leads to an increase in GDP of 5 * $2 billion = $10 billion.

An Economy Saves 20 Percent of Any Increase in Income