If the MPE is equal to .7, a one percentage point decrease in the real interest rate increases investment spending by $100 billion and exports by $20 billion, the real interest rate is equal to 5%, and government purchases increase by $200 billion, the change in the equilibrium level of real GDP would be
A) -$.667 trillion.
B) $.667 trillion.
C) -$.286 trillion.
D) $.286 trillion.

Question

Quizplus · Accepted Answer

Given the MPE (marginal propensity to expend) is 0.7, the multiplier is 1/(1-MPE) = 1/(1-0.7) = 3.33. The total increase in spending is $100 billion (from investment) + $20 billion (from exports) + $200 billion (from government purchases) = $320 billion. The change in the equilibrium level of real GDP is then 3.33 * $320 billion = $1.066 trillion, or rounded to $.667 trillion.

If the MPE Is Equal to