-Suppose the MPC in the economy in Figure 10.2 equals 0.75 and the shift from AD₀ to AD₁ was caused by a decrease in investment of $50 billion.What will happen to the equilibrium level of real output as a result of the initial $50 billion decrease? A)It will fall by less than $200 billion. B)It will fall by exactly $200 billion. C)It will fall by more than $200 billion. D)It will fall by less than $67 billion.

Question

Quizplus · Accepted Answer

The multiplier is 1/(1-MPC) = 1/(1-0.75) = 4. So the initial $50 billion decrease in investment will lead to a decrease in equilibrium real output of 4 * $50 billion = $200 billion.

-Suppose the MPC in the Economy in Figure 10