Homework Answers
(1) Spending multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 1 / 0.2 = 5
So, when investment decreases by $5 billion, real GDP decreases by ($5 billion x 5) = $25 billion.
New level of real GDP = $(250 - 25) billion = $225 billion
(2) (C)
A fall in investment lowers real GDP, which induces a fall in consumption.
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