If initial equilibrium real Gross Domestic Product (GDP) is $500 billion, MPC = 0.9, and autonomous investment increases $40 billion, equilibrium real Gross Domestic Product (GDP) will be
A) $540 billion.
B) $600 billion.
C) $800 billion.
D) $900 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, so 10 * $40 billion = $400 billion. Adding this to the initial GDP of $500 billion results in a new equilibrium GDP of $900 billion.

If Initial Equilibrium Real Gross Domestic Product (GDP) Is $500