Question

If the marginal propensity to save is 0.25, investment spending is $700 million, and the government increases its purchases of goods and services by $100 million, then real GDP increases by: A. $25 million. B. $175 million. C. $400 million. D. $2,800 million.

Answer 1

`\Delta Y = $400 million`

Step-by-step explanation:

Given data:

marginal propensity = 0.25

investment spending is $700 million

increment in goods by $100 million

we know multiplier is given as

`m = (1)/(MPS)`

`= (1)/(0.25) = 4`

Increment in GDP is calculated as

`m = (\Delta Y)/(\Delta G)`

where \Delta G is increment in goods

`\Delta Y = 4 * 100`

`\Delta Y = $400 million`