Suppose that planned autonomous investment increases by $200 billion and that the marginal propensity to consume equals 0.80.The equilibrium level of real GDP will increase by
A)$40 billion
B)$160 billion
C)$200 billion
D)$250 billion
E)$1,000 billion

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), which in this case is 1/(1-0.80) = 5. The increase in investment is $200 billion, so the increase in GDP is 5 * $200 billion = $1,000 billion.

Suppose That Planned Autonomous Investment Increases by $200 Billion and That