If initial equilibrium real Gross Domestic Product (GDP)is $400 billion, MPC = 0.9, and autonomous investment increases $40 billion, equilibrium real Gross Domestic Product (GDP)will be
A)$440 billion.
B)$360 billion.
C)$600 billion.
D)$800 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), which is 1/(1-0.9) = 10. The increase in GDP is the multiplier times the increase in investment: 10 * $40 billion = $400 billion. Adding this to the initial GDP of $400 billion results in a new equilibrium GDP of $800 billion.

If Initial Equilibrium Real Gross Domestic Product (GDP)is $400 Billion