If the marginal propensity to consume is 0.9 and investment spending increases by $50 billion,the change in real GDP will be $5 billion.

Question

Quizplus · Accepted Answer

The change in real GDP is calculated using the spending multiplier, which is 1/(1-MPC). With an MPC of 0.9, the multiplier is 10. Therefore, a $50 billion increase in investment spending would increase real GDP by $500 billion, not $5 billion.

If the Marginal Propensity to Consume Is 0