A $50 million increase in investment spending will eventually cause equilibrium real GDP to:

Question

Quizplus · Accepted Answer

The multiplier effect will cause an increase in equilibrium real GDP greater than the initial increase in investment spending. The size of the multiplier effect depends on the marginal propensity to consume (MPC). The higher the MPC, the larger the multiplier effect. Assuming a MPC of 0.8, the $50 million increase in investment spending would lead to an eventual increase of $250 million in equilibrium real GDP ($50 million / 1 - 0.8).

A $50 Million Increase in Investment Spending Will Eventually Cause