Suppose that the marginal propensity to consume (MPC) is .8 and there is an increase in investment spending of $100,000. As a result, equilibrium real Gross Domestic Product (GDP) would increase by
A) $20,000.
B) $100,000.
C) $500,000.
D) $800,000.

Question

Quizplus · Accepted Answer

The multiplier effect formula is 1/(1-MPC). With an MPC of .8, the multiplier is 1/(1-.8) = 5. Therefore, an increase in investment spending of $100,000 would increase the equilibrium real GDP by 5 * $100,000 = $500,000.

Suppose That the Marginal Propensity to Consume (MPC) Is