In the third quarter of 2008, investment in the U.S. totaled $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 ________.
A) 2; $1 trillion
B) 5; $1 trillion
C) 2; $200 million
D) 5; $500 million

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC), which equals 1/(1-0.80) = 5. The change in investment is $1.4 trillion - $1.3 trillion = $0.1 trillion or $100 billion. The decrease in equilibrium expenditure due to the change in investment is the change in investment times the multiplier, which is $100 billion * 5 = $500 million.

In the Third Quarter of 2008, Investment in the U