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 new level of real GDP is

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC) = 1/(1-0.75) = 4. The increase in investment is $4 billion, so the total increase in GDP is 4 * $4 billion = $16 billion. Adding this to the initial GDP of $120 billion gives a new GDP of $136 billion.

An Economy Has No Imports or Income Taxes