When the multiplier is ________ , an autonomous decrease in investment of $200 billion decreases equilibrium real GDP by $400 billion. When the multiplier is ________ , an autonomous decrease in investment of $200 billion decreases equilibrium real GDP by $800 billion.
A) 2.0; 4.0
B) 0.2; 0.4
C) 0.4; 0.2
D) $400 billion; $800 billion
E) 4.0; 8.0

Question

Quizplus · Accepted Answer

The formula for the multiplier is 1/(1-MPC), where MPC is the marginal propensity to consume. Assuming a constant MPC, a multiplier of 2.0 means that a $1 autonomous change in investment would lead to a $2 change in equilibrium GDP. Therefore, an autonomous decrease in investment of $200 billion would lead to a decrease in equilibrium real GDP of $400 billion (2*$200 billion). Similarly, a multiplier of 4.0 means a $1 autonomous change in investment would lead to a $4 change in equilibrium GDP, and an autonomous decrease in investment of $200 billion would lead to a decrease in equilibrium real GDP of $800 billion (4*$200 billion).

When the Multiplier Is ________ , an Autonomous Decrease in Investment