If autonomous investment increases by $100 million and the marginal propensity to consume (MPC) is 0.75, then
If autonomous investment increases by $100 million and the marginal propensity to consume (MPC) is 0.75, then
A. real Gross Domestic Product (GDP) will fall by $200 billion.
B. real Gross Domestic Product (GDP) will rise by $100 billion.
C. real Gross Domestic Product (GDP) will rise by $200 billion.
D. real Gross Domestic Product (GDP) will rise by $400 billion.
Homework Answers
Ans: D) real Gross Domestic Product ( GDP ) will rise by $400 billion
Explanation:
Here , MPC = 0.75
∆I = $100
Where I stands for autonomous investment.
Multiplier = 1 / ( 1- MPC ) = 1 / ( 1 - 0.75) = 1 / 0.25 = 4
Increase in GDP = ∆I * Multiplier = $100 * 4 = $400
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