If the economy spends 80 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 0.8, meaning it spends 80% of any increase in income. The multiplier effect is calculated as 1/(1-MPC) = 1/(1-0.8) = 5. Therefore, an increase in investment of $1 billion would result in an increase in real GDP of $1 billion * 5 = $5 billion.

If the Economy Spends 80 Percent of Any Increase in Real