Figure 23-3

-Refer to Figure 23-3. Suppose that investment spending decreases by $5 million,decreasing aggregate expenditure and decreasing real GDP from GDP₂ to GDP₁. If the MPC is 0.8,then what is the change in GDP?
A) -$4 million
B) -$5 million
C) -$25 million
D) -$40 million

Question

Figure 23-3
 
-Refer to Figure 23-3. Suppose that investment spending decreases by $5 million,decreasing aggregate expenditure and decreasing real GDP from GDP₂ to GDP₁. If the MPC is 0.8,then what is the change in GDP?
A) -$4 million 
B) -$5 million 
C) -$25 million 
D) -$40 million

Quizplus · Accepted Answer

The change in GDP can be calculated using the spending multiplier, which is 1/(1-MPC). With an MPC of 0.8, the multiplier is 5. Therefore, a $5 million decrease in investment spending results in a $25 million decrease in GDP (5 * $5 million = $25 million).

Figure 23-3 -Refer to Figure 23-3. Suppose That Investment Spending Decreases by Investment