If the price level is constant and the slope of the AE curve is 0.75, a decrease in investment of $100 leads to a decrease in real GDP of
A) $400.
B) $800.
C) $25.
D) $100.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Here, the slope of the AE curve is 0.75, which is the MPC. The multiplier is 1/(1-0.75) = 4. Therefore, a decrease in investment of $100 leads to a decrease in real GDP of $100 * 4 = $400.

If the Price Level Is Constant and the Slope of the AE