Assume the MPE has a value of 0.8 and investment spending increases by $5 billion,what will the level of GDP increase by?
A)$1 billion.
B)$4 billion.
C)$25 billion.
D)$40 billion.
E)$20 billion.

Question

Quizplus · Accepted Answer

The level of GDP will increase by $25 billion because the multiplier is 1/(1-MPE) = 1/(1-0.8) = 5. Therefore, an increase in investment spending of $5 billion will lead to a total increase in GDP of 5 * $5 billion = $25 billion.

Assume the MPE Has a Value of 0