If the MPC is 0.9 and investment spending increases by $20 billion, real GDP will increase by $200
billion.

Question

Quizplus · Accepted Answer

According to the formula for calculating the total change in real GDP due to a change in investment spending:

Change in Real GDP = (Change in Investment) x (Multiplier)

Where:

Multiplier = 1 / (1 - MPC)
MPC = Marginal Propensity to Consume

Plugging in the given values:

Change in Investment = $20 billion
MPC = 0.9

Multiplier = 1 / (1 - 0.9) = 10

Change in Real GDP = $20 billion x 10 = $200 billion

Therefore, the statement is true.

If the MPC Is 0