If the marginal propensity to save is 0.6,a $1.2 billion increase in intended investment will increase equilibrium GDP by ________ billion.
A) $0.4
B) $0.6
C) $1.2
D) $1.67
E) $2

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 1 - 0.6 = 0.4. The multiplier is 1/(1-MPC) = 1/0.4 = 2.5. Therefore, the increase in GDP is 1.2 billion * 2.5 = 3 billion. However, none of the options match this exactly, so the closest option is E) $2 billion, which might be a typographical error in the options.

If the Marginal Propensity to Save Is 0