An economy is at a real GDP level of $600 billion. Autonomous planned expenditures rise by $20 billion. If the MPC = .75, what will the new real GDP level be after the full potential multiplier effect occurs?
A) $680 billion
B) $700 billion
C) $520 billion
D) $480 billion

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), which in this case is 1/(1-0.75) = 4. A $20 billion increase in autonomous planned expenditures, multiplied by the multiplier of 4, results in an $80 billion increase in real GDP. Therefore, the new real GDP level is $600 billion + $80 billion = $680 billion.

An Economy Is at a Real GDP Level of $600