Equilibrium real GDP is $400 billion, the MPC = 0.9, and there are no income taxes or imports. Investment increases $40 billion. If the price level is constant, after the increase in investment, equilibrium real GDP will be

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Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC) = 1/(1-0.9) = 10. The increase in investment is $40 billion, so the total increase in GDP is 40 billion * 10 = $400 billion. Adding this to the initial GDP of $400 billion results in a new equilibrium GDP of $800 billion.

Equilibrium Real GDP Is $400 Billion, the MPC = 0