If the MPC is .70 and gross investment increases by $3 billion, the equilibrium GDP will:
A)increase by about $10 billion.
B)increase by $2.10 billion.
C)decrease by $4.29 billion.
D)increase by $4.29 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.70, the multiplier is 1/(1-0.70) = 3.33. Therefore, an increase in investment of $3 billion will increase the equilibrium GDP by 3.33 * $3 billion = $10 billion.

If the MPC Is