In the third quarter of 2008, investment in the U.S. totalled $1.4 trillion and in 2007, investment was $1.3 trillion. In addition, third quarter real GDP was $11 trillion. Suppose the MPC in the U.S. is 0.80.
Ignoring the effects of imports and taxes, the multiplier is and__________ the change in investment will decrease equilibrium expenditure by __________.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC), which is 5. The change in investment is $1.4 trillion - $1.3 trillion = $0.1 trillion or $100 billion. The decrease in equilibrium expenditure is the multiplier times the change in investment, which is 5 * $100 billion = $500 million.

In the Third Quarter of 2008, Investment in the U