A $1 billion increase in investment will cause a
A) (1/MPS) billion increase in GDP.
B) (MPS) billion increase in GDP.
C) (1 − MPC) billion increase in GDP.
D) (MPC − MPS) billion increase in GDP.

Question

Quizplus · Accepted Answer

The correct answer is A because the increase in GDP due to an increase in investment is determined by the multiplier effect, which is 1/MPS (Marginal Propensity to Save). The formula reflects how initial increases in spending (such as investment) lead to larger increases in GDP.

A $1 Billion Increase in Investment Will Cause a