Suppose the marginal propensity to consume (MPC) equals 0.80, an increase in autonomous investment of $200 will lead to an increase in real Gross Domestic Product (GDP) by
A) $400.
B) $500.
C) $800.
D) $1,000.

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 0.80, the multiplier is 1/(1-0.80) = 5. Therefore, an increase in autonomous investment of $200 leads to an increase in real GDP of 200 * 5 = $1,000.

Suppose the Marginal Propensity to Consume (MPC) Equals 0