A decrease in autonomous investment of $100 that occurs when the marginal propensity to save (MPS)equals 0.25 will lead to a decrease in real Gross Domestic Product (GDP)of
A)$25.
B)$100.
C)$400.
D)$800.

Question

Quizplus · Accepted Answer

The decrease in autonomous investment of $100 will lead to a decrease in aggregate demand, which will lead to a decrease in GDP. The multiplier effect will magnify the initial decrease in investment. The multiplier (1/MPS) in this case is 4. Therefore, the decrease in GDP will be equal to 4 times the initial decrease in investment, which is $400.

A Decrease in Autonomous Investment of $100 That Occurs When