Refer to Figure 9.3 for the following questions.
Figure 9.3

-Suppose that in Figure 9.3, investment spending increases by $10 million, shifting up the aggregate expenditure line and GDP increases from GDP₁ to GDP₂. If the MPC is 0.9, then what is the change in GDP?
A)$90 million
B)$9 million
C)$10 million
D)$100 million

Question

Refer to Figure 9.3 for the following questions.
Figure 9.3
 
-Suppose that in Figure 9.3, investment spending increases by $10 million, shifting up the aggregate expenditure line and GDP increases from GDP₁ to GDP₂. If the MPC is 0.9, then what is the change in GDP?
A)$90 million 
B)$9 million 
C)$10 million 
D)$100 million

Quizplus · Accepted Answer

The change in GDP can be calculated using the multiplier effect formula, which is 1/(1-MPC). With an MPC of 0.9, the multiplier is 1/(1-0.9) = 10. Therefore, an initial increase in investment spending of $10 million leads to a total increase in GDP of 10 * $10 million = $100 million.

Refer to Figure 9.3 for the Following Questions