Suppose that the economy's marginal propensity to consume is 0.67. Assuming that prices are constant, a $200 million increase in investment spending would increase equilibrium real GDP by
A) $200 million
B) $450 million
C) $525 million
D) $600 million

Question

Quizplus · Accepted Answer

The increase in equilibrium real GDP can be calculated using the multiplier effect formula: Multiplier = 1 / (1 - MPC), where MPC is the marginal propensity to consume. Here, MPC = 0.67, so the multiplier = 1 / (1 - 0.67) = 3.03. Therefore, a $200 million increase in investment spending would increase GDP by 3.03 * $200 million = $606 million, which is closest to $600 million (D).

Suppose That the Economy's Marginal Propensity to Consume Is 0