An economy has a fixed price level, no imports, and no income taxes. MPC is 0.5 and real GDP is $300 billion. Businesses increase investment by $10 billion. The new level of real GDP is
A)$320 billion.
B)$20 billion.
C)$5 billion.
D)$305 billion.
E)$300 billion.

Question

Quizplus · Accepted Answer

With an MPC of 0.5, an increase in investment of $10 billion would lead to a multiplier effect of 2 (1/1-MPC) which means an increase in GDP of $20 billion. So the new level of real GDP would be $300 billion + $20 billion = $320 billion.

An Economy Has a Fixed Price Level, No Imports, and No