Suppose the marginal propensity to consume (MPC)is 0.9 and there is a $3,000 increase in planned investment. Given this information, real GDP will increase by
A)$3,000.
B)$2,700.
C)$30,000.
D)$3,333.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.9, the multiplier is 10. Therefore, a $3,000 increase in investment will increase real GDP by $3,000 * 10 = $30,000.

Suppose the Marginal Propensity to Consume (MPC)is 0