Suppose the marginal propensity to consume (MPC)equals 0.80, an increase in autonomous investment of $100 will lead to an increase in real Gross Domestic Product (GDP)by
A)$100.
B)$400.
C)$500.
D)$800.

Question

Quizplus · Accepted Answer

The multiplier effect can be calculated using the formula: 1/(1-MPC). In this case, the multiplier would be 1/(1-0.80) = 5. With the increase in autonomous investment of $100, the total increase in GDP would be 5 times that amount, or $500. Therefore, the correct answer is C.

Suppose the Marginal Propensity to Consume (MPC)equals 0