Assume there is no government or foreign sector. If the MPS is 0.2, a $40 billion decrease in planned investment will cause aggregate output to decrease by
A) $20 billion.
B) $50 billion.
C) $80 billion.
D) $200 billion.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC), where MPC = 1 - MPS. Here, MPS = 0.2, so MPC = 0.8. The multiplier is 1/(1-0.8) = 5. Therefore, a $40 billion decrease in investment will decrease aggregate output by 40 * 5 = $200 billion.

Assume There Is No Government or Foreign Sector