If the MPC is 0.70 and investment increases by $3 billion, the equilibrium GDP will
A) increase by $10 billion.
B) increase by $2.10 billion.
C) decrease by $4.29 billion.
D) increase by $4.29 billion.

Question

Quizplus · Accepted Answer

The increase in equilibrium GDP can be calculated using the multiplier effect formula, which is 1/(1-MPC). With an MPC of 0.70, the multiplier is 1/(1-0.70) = 3.33. An increase in investment by $3 billion leads to an increase in GDP by 3.33 * $3 billion = $10 billion.

If the MPC Is 0