In the aggregate expenditures model, assume that the MPC is 0.75. An increase in investment spending of $6 billion would produce an ultimate increase in real GDP of:
A)$0.25 billion.
B)$0.75 billion.
C)$12 billion.
D)$24 billion.

Question

Quizplus · Accepted Answer

The multiplier effect in the aggregate expenditures model is calculated as 1/(1-MPC). With an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. Therefore, an increase in investment spending of $6 billion would lead to an increase in real GDP of 4 * $6 billion = $24 billion.

In the Aggregate Expenditures Model, Assume That the MPC Is