A decrease in autonomous investment of $200 that occurs when the marginal propensity to save (MPS) equals 0.25 will lead to a decrease in real Gross Domestic Product (GDP) of
A) $25.
B) $50.
C) $800.
D) $80.

Question

Quizplus · Accepted Answer

The formula for the spending multiplier is: 
Spending multiplier = 1 / (1 - MPC) 
where MPC is the marginal propensity to consume.

But since MPS + MPC = 1, we can also use:
Spending multiplier = 1 / MPS

In this case, MPS = 0.25, so: 
Spending multiplier = 1 / 0.25 = 4

To calculate the decrease in GDP, we can use the formula: 
Change in GDP = change in investment * spending multiplier

The change in investment is given as -$200, so: 
Change in GDP = (-$200) * 4 = -$800

Therefore, the correct answer is C.

A Decrease in Autonomous Investment of $200 That Occurs When