Suppose that the marginal propensity to consume (MPC)is .75 and there is an increase in investment spending of $100,000. As a result, equilibrium real Gross Domestic Product (GDP)would increase by
A)$75,000.
B)$100,000.
C)$400,000.
D)$750,000.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. Therefore, an increase in investment spending of $100,000 would increase GDP by $100,000 * 4 = $400,000.

Suppose That the Marginal Propensity to Consume (MPC)is