If autonomous investment increases by $200 billion and the marginal propensity to consume (MPC)is 0.5, then
A)real Gross Domestic Product (GDP)will rise by $400 billion.
B)real Gross Domestic Product (GDP)will rise by $200 billion.
C)real Gross Domestic Product (GDP)will rise by $100 billion.
D)real Gross Domestic Product (GDP)will decrease by $100 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.5, the multiplier is 2. Therefore, an increase in autonomous investment by $200 billion will increase GDP by $200 billion * 2 = $400 billion.

If Autonomous Investment Increases by $200 Billion and the Marginal