If autonomous investment increases by $100 million and the marginal propensity to consume (MPC) is 0.75, then
A) real Gross Domestic Product (GDP) will rise by $400 million.
B) real Gross Domestic Product (GDP) will rise by $100 million.
C) real Gross Domestic Product (GDP) will rise by $200 million.
D) real Gross Domestic Product (GDP) will fall by $200 million.

Question

Quizplus · Accepted Answer

The increase in real GDP can be calculated using the multiplier effect formula, which is 1/(1-MPC). With an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. Therefore, a $100 million increase in autonomous investment leads to a $400 million increase in real GDP.

If Autonomous Investment Increases by $100 Million and the Marginal