Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by
A) $3 billion.
B) $2/3 billion.
C) $6 billion.
D) $2 billion.

Question

Quizplus · Accepted Answer

The formula for calculating the change in GDP due to a change in investment spending is:

ΔGDP = ΔI / (1 - MPC)

Given that MPC = 2/3 and ΔI = $2 billion, we can plug in these values to get:

ΔGDP = $2 billion / (1 - 2/3)
ΔGDP = $2 billion / 1/3
ΔGDP = $6 billion

Therefore, the level of GDP will increase by $6 billion if investment spending increases by $2 billion, making option C the correct answer.

Assume the MPC Is 2/3