If the marginal propensity to consume (MPC)is 0.90, a $100 increase in investment spending, other things being equal, will cause an increase in equilibrium real GDP of:
A)$90.
B)$100.
C)$900.
D)$1,000.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.90, the multiplier is 1/(1-0.90) = 10. Therefore, a $100 increase in investment spending will increase equilibrium real GDP by $100 * 10 = $1,000.

If the Marginal Propensity to Consume (MPC)is 0