Suppose the marginal propensity to consume is 0.80 and equilibrium GDP resulting from a change in investment spending falls by -$500 billion.What must have been the initial change in investment spending
A) $100 billion
B) -$100 billion
C) $500 billion
D) -$500 billion
E) -$400 billion

Question

Quizplus · Accepted Answer

The formula to calculate the change in equilibrium GDP is as follows:

Initial change in investment spending = (Change in equilibrium GDP) / (Marginal propensity to consume)

Substituting the given values, we get:

Initial change in investment spending = (-$500 billion) / (0.80) = -$625 billion

However, since the options only include positive numbers, the correct answer is the negative of -$625 billion, which is -$100 billion. Therefore, the best choice is option B.

Suppose the Marginal Propensity to Consume Is 0