In a private closed economy where MPC = 0.8, if consumers reduce their spending by $10 billion and firms cut investments by $5 billion, then equilibrium GDP will decrease by:
A) $75 billion
B) $25 billion
C) $18.8 billion
D) $15 billion

Question

Quizplus · Accepted Answer

The multiplier is 1/(1-MPC) = 1/(1-0.8) = 5. The total decrease in spending is $10 billion + $5 billion = $15 billion. The decrease in equilibrium GDP is 5 * $15 billion = $75 billion.

In a Private Closed Economy Where MPC = 0