Suppose the marginal propensity to consume (MPC) is 0.8 and there is a $1,000 increase in autonomous consumption. Given this information, real GDP will increase by
A) $1,600.
B) $2,000.
C) $2,500.
D) $5,000.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.8, the multiplier is 1/(1-0.8) = 5. Therefore, a $1,000 increase in autonomous consumption will increase real GDP by 5 * $1,000 = $5,000.

Suppose the Marginal Propensity to Consume (MPC) Is 0