Given an MPC of 0.80, if there are no income taxes or imports and prices are constant, then when investment increases by $50 million, when prices are fixed equilibrium GDP would
A) increase by $250 million.
B) increase by $400 million.
C) increase by $50 million.
D) To answer the question more information on income is needed.

Question

Quizplus · Accepted Answer

The multiplier is 1/(1-MPC) = 1/(1-0.8) = 5. So, a $50 million increase in investment will lead to a $50 million * 5 = $250 million increase in equilibrium GDP.