If the multiplier is 4 and investment spending falls by $100 billion, the change in real GDP will be:

Question

Quizplus · Accepted Answer

The multiplier effect indicates that a change in investment spending will lead to a larger change in real GDP. The formula for the multiplier effect is 1/(1-MPC) or simply the multiplier given, which is 4 in this case. Therefore, if investment spending falls by $100 billion, the change in real GDP will be 4 times that amount, leading to a -$400 billion change.

If the Multiplier Is 4 and Investment Spending Falls by $100