Assume there is no government or foreign sector. If the multiplier is 5, a $10 billion increase in investment will cause equilibrium output to increase by:

Question

Quizplus · Accepted Answer

The multiplier formula for a closed economy without government or foreign sector is: 1/(1-MPC), where MPC is the marginal propensity to consume. Since there is no government or foreign sector, MPC=1, making the multiplier equal to 1/(1-1) = 1/0 = undefined. However, the question gives a multiplier of 5, so we can assume that there is an exogenous increase in the MPC, such that the new multiplier is 5. Solving for the change in output, we get: $10 billion x 5 = $50 billion. Therefore, a $10 billion increase in investment will cause equilibrium output to increase by $50 billion.

Assume There Is No Government or Foreign Sector