If an economy saves 20 percent of any increase in real Gross Domestic Product (GDP), then an increase in investment of $2 billion can produce an increase in real Gross Domestic Product (GDP)of as much as
A)$2 billion.
B)$10 billion.
C)$0.4 billion.
D)$1.6 billion.

Question

Quizplus · Accepted Answer

If an economy saves 20% of any increase in real GDP, it means that 80% of the increase goes towards consumption. Therefore, an increase in investment of $2 billion would increase GDP by:

Increase in GDP = 2 billion / (1 - 0.8)
Increase in GDP = 2 billion / 0.2
Increase in GDP = 10 billion

Therefore, the answer is (B) $10 billion.

If an Economy Saves 20 Percent of Any Increase in Real