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Fact 27.3.1
An economy has a fixed price level, no imports, and no income taxes. MPC is 0.5 and real GDP is $200 billion. Businesses increase investment by $2 billion.
-Consider Fact 27.3.1. The increase in real GDP is
A)$2 billion.
B)$4 billion.
C)$202 billion.
D)$404 billion.
E)$1.6 billion.

Question

Quizplus · Accepted Answer

The multiplier effect of the increase in investment is 1/ (1-MPC) = 2. Real GDP will increase by 2 times the increase in investment, which is $4 billion. Thus, the answer is B) $4 billion.

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