An economy saves 20 percent of any increase in income and there are no income taxes or imports. Then, an increase in investment of $2 billion can produce a short run increase in real GDP of as much as

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According to the marginal propensity to save, the percentage of an increase in income that is saved is 20 percent. Therefore, if there is an increase in investment of $2 billion, only 80 percent of it ($1.6 billion) will actually be spent on goods and services. This increase in spending will lead to an increase in production, and since there are no other limitations in the scenario, the increase in real GDP can be as much as ten times the increase in spending, or $16 billion.

An Economy Saves 20 Percent of Any Increase in Income