Other things being constant, if the marginal propensity to save (MPS)is 0.1, and private investment spending falls by $100 million, then real Gross Domestic Product (GDP)
A)decreases by $10 million.
B)increases by $90 million.
C)decreases by $1 billion.
D)increases by $1 billion.

Question

Quizplus · Accepted Answer

The multiplier effect tells us that the initial change in investment spending will have a greater impact on GDP as it ripples through the economy. The formula for the multiplier is 1/MPS. In this case, the multiplier is 1/0.1 = 10. Therefore, the $100 million decrease in investment spending will lead to a $1 billion decrease in GDP (10 x $100 million).

Other Things Being Constant, If the Marginal Propensity to Save