Assume the marginal propensity to save is 0.10. Firms become optimistic and increase investment spending by $10 billion. Other things being equal, real GDP will:

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Quizplus · Accepted Answer

The marginal propensity to save (MPS) is 0.10, which means the marginal propensity to consume (MPC) is 1 - MPS = 0.90. The multiplier effect is 1/(1-MPC) = 1/(1-0.90) = 10. Therefore, a $10 billion increase in investment spending will increase real GDP by 10 times that amount, or $100 billion.

Assume the Marginal Propensity to Save Is 0