When the multiplier is ________, an autonomous decrease in investment of $200 billion decreases equilibrium real GDP by $400 billion. When the multiplier is ________, an autonomous decrease in investment of $200 billion decreases equilibrium real GDP by $800 billion.
A) 2.0; 4.0
B) 0.4; 0.2
C) $400 billion; $800 billion
D) 4.0; 8.0
E) 0.2; 0.4

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC) or 1/MPS, where MPC is the marginal propensity to consume and MPS is the marginal propensity to save. A multiplier of 2.0 means that for every $1 decrease in investment, GDP decreases by $2, thus a $200 billion decrease in investment leads to a $400 billion decrease in GDP. Similarly, a multiplier of 4.0 means a $200 billion decrease in investment leads to an $800 billion decrease in GDP.

When the Multiplier Is ________, an Autonomous Decrease in Investment