Assume there is no government or foreign sector. If the multiplier is 10, a $10 billion increase in planned investment will cause aggregate output to increase by
A) $1 billion.
B) $5 billion.
C) $10 billion.
D) $100 billion.

Question

Quizplus · Accepted Answer

The multiplier effect indicates how much an increase in investment will increase total output. The formula for the multiplier is 1/(1-MPC), where MPC is the marginal propensity to consume. Given a multiplier of 10, a $10 billion increase in planned investment will increase aggregate output by 10 times that amount, resulting in a $100 billion increase in aggregate output.

Assume There Is No Government or Foreign Sector