If an economy saves 20 percent of any increase in income,then an increase in investment of $2 billion can produce an increase in income of as much as

Question

Quizplus · Accepted Answer

If an increase in investment of $2 billion produces an increase in income, then the economy will save 20 percent of that increase (i.e. $0.4 billion). This $0.4 billion will be re-invested, leading to a further increase in income (i.e. $0.08 billion). This cycle will continue, with each round of re-investment producing a smaller and smaller amount of additional income. Using the formula for a geometric series, we can calculate the total increase in income as follows:

$2 billion / (1 - 0.2) = $2.5 billion

Therefore, an increase in investment of $2 billion can produce an increase in income of up to $2.5 billion.

If an Economy Saves 20 Percent of Any Increase in Income,then