An economy has no imports or income taxes.The MPC is 0.75 and real GDP is $120 billion.Businesses increase investment by $4 billion.The multiplier is ________ and the change in real GDP from the increase in investment is ________ billion.

Question

Quizplus · Accepted Answer

The multiplier is 1/(1-MPC) = 1/(1-0.75) = 4. The change in real GDP is the multiplier times the change in investment, which is 4 * $4 billion = $16 billion.

An Economy Has No Imports or Income Taxes