Suppose marginal propensity to consume (MPC) is 0.7 and there is a $100 increase in autonomous consumption. Given this information, real GDP will increase by
A) $333.
B) $143.
C) $1,000.
D) $700.

Question

Quizplus · Accepted Answer

The increase in real GDP can be calculated using the multiplier effect formula: 1/(1-MPC). With an MPC of 0.7, the multiplier is 1/(1-0.7) = 3.33. Therefore, a $100 increase in autonomous consumption leads to a $333 increase in real GDP (100 * 3.33).

Suppose Marginal Propensity to Consume (MPC) Is 0