If an economy spends 90 percent of any increase in real GDP, then an increase in investment of $1 billion would result ultimately in an increase in real GDP of:

Question

Quizplus · Accepted Answer

The economy's marginal propensity to consume (MPC) is 0.9, meaning 90% of any increase in income is spent. The multiplier effect is calculated as 1/(1-MPC), which is 1/(1-0.9) = 10. Therefore, an increase in investment of $1 billion would result in an increase in real GDP of $1 billion * 10 = $10 billion.

If an Economy Spends 90 Percent of Any Increase in Real