Suppose marginal propensity to consume (MPC)is 0.7 and there is a $1,000 increase in autonomous consumption. Given this information, real GDP will increase by
A)$3,333.
B)$1,429.
C)$1,000.
D)$700.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.7, the multiplier is 1/(1-0.7) = 3.33. Therefore, a $1,000 increase in autonomous consumption will increase real GDP by 3.33 * $1,000 = $3,333.

Suppose Marginal Propensity to Consume (MPC)is 0