If the marginal propensity to consume is 0.75 and investment spending decreases by $20 billion,what will be the overall effect on GDP?
A) GDP will decrease by $20 billion
B) GDP will increase by $15 billion
C) GDP will decrease by $80 billion
D) GDP will decrease by $30 billion
E) GDP will decrease by $26.7 billion

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Here, MPC is 0.75, so the multiplier is 1/(1-0.75) = 4. Therefore, a $20 billion decrease in investment will lead to a $20 billion x 4 = $80 billion decrease in GDP.

If the Marginal Propensity to Consume Is 0