Suppose real GDP is $800 billion when the MPC is 0.80, and people decide to increase their saving by $30 billion. Before this change, the economy was in equilibrium with people intending to save $100 billion and producers intending to invest $100 billion. The new equilibrium level of real GDP is:
A)$600 billion.
B)$650 billion.
C)$680 billion.
D)$730 billion.
E)$800 billion.

Question

Quizplus · Accepted Answer

The multiplier is 1/(1-MPC) = 5. The increase in saving reduces consumption by $30 billion, leading to a decrease in GDP by $30 billion * 5 = $150 billion. Thus, the new GDP is $800 billion - $150 billion = $650 billion.

Suppose Real GDP Is $800 Billion When the MPC Is