Figure 12-3
-Refer to Figure 12-3.Suppose that investment spending decreases by $5 million,decreasing aggregate expenditure and decreasing real GDP from GDP2 to GDP1.If the MPC is 0.8,then what is the change in GDP?
A)-$4 million
B)-$5 million
C)-$25 million
D)-$40 million

Question

Figure 12-3 
-Refer to Figure 12-3.Suppose that investment spending decreases by $5 million,decreasing aggregate expenditure and decreasing real GDP from GDP2 to GDP1.If the MPC is 0.8,then what is the change in GDP?
A)-$4 million 
B)-$5 million 
C)-$25 million 
D)-$40 million

Quizplus · Accepted Answer

The change in GDP can be calculated using the spending multiplier, which is 1/(1-MPC). With an MPC of 0.8, the multiplier is 5. Therefore, a $5 million decrease in investment spending results in a $25 million decrease in GDP (5 * $5 million = $25 million).

Figure 12-3 -Refer to Figure 12-3.Suppose That Investment Spending Decreases by $5