Suppose the marginal propensity to consume (MPC)is 0.8 and there is a $4,000 increase in planned investment. Given this information, real GDP will increase by
A)$4,000.
B)$20,000.
C)$5,000.
D)$2,000.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.8, the multiplier is 1/(1-0.8) = 5. Therefore, a $4,000 increase in investment will increase real GDP by 5 * $4,000 = $20,000.

Suppose the Marginal Propensity to Consume (MPC)is 0