Consider an economy that is in equilibrium with real GDP = $5, 000, MPS= 1/4 and MPI = 1/5.What will be the new equilibrium level of income if planned investment spending increases by $500?

Question

Quizplus · Accepted Answer

The multiplier, k = 1/(1-MPC) = 1/(1-1/4) = 4/3.

The government spending multiplier = k/(1-MPT) = (4/3)/(1-0) = 4/3.

The new equilibrium level of income = $5,000 + ($500) x (4/3) = $6,666.67 ≈ $6,111.

Therefore, the best choice is C.

Consider an Economy That Is in Equilibrium with Real GDP