Suppose business decision makers become more optimistic about the future and, as a result, increase their investment spending by $20 billion. If the economy's marginal propensity to consume is 0.75, the equilibrium level of aggregate real GDP will increase by:
A) $15 billion.
B) $20 billion.
C) $50 billion.
D) $80 billion.

Question

Quizplus · Accepted Answer

The equation for determining the change in equilibrium real GDP resulting from a change in investment spending is ∆Y = ∆I/(1-MPC). Plugging in the values, we get ∆Y = $20 billion/(1-0.75) = $80 billion. Therefore, the equilibrium level of real GDP will increase by $80 billion.

Suppose Business Decision Makers Become More Optimistic About the Future