If the marginal propensity to consume 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) $2.5
E) $3

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.6, the multiplier is 1/(1-0.6) = 2.5. Therefore, a $1.2 billion increase in investment will increase GDP by 2.5 * $1.2 billion = $3 billion.

If the Marginal Propensity to Consume Is 0