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 and prices are fixed, equilibrium GDP would
A) increase by $50 million.
B) increase by $250 million.
C) increase by $400 million.
D) To answer the question more information on income is needed.

Question

Quizplus · Accepted Answer

The multiplier effect formula is 1/(1-MPC). With an MPC of 0.80, the multiplier is 1/(1-0.80) = 5. Therefore, an increase in investment of $50 million would increase equilibrium GDP by 5 * $50 million = $250 million.