Between 2012 and 2013 the government reports that investment decreased by $400 billion. The government also estimates that the marginal propensity to save is 0.20. If the entire decrease in investment is autonomous, then real GDP

Question

Quizplus · Accepted Answer

The decrease in investment leads to a decrease in real GDP by a multiplier effect. The multiplier is calculated as 1/(1-MPC) or 1/MPS. Given the marginal propensity to save (MPS) is 0.20, the multiplier is 1/0.20 = 5. Therefore, a $400 billion decrease in investment results in a 5 * $400 billion = $2000 billion decrease in real GDP.

Between 2012 and 2013 the Government Reports That Investment Decreased