Question

Suppose in the hypothetical economy of Jacksonland, the MPC is 0.80 and real GDP is $150 billion. Businesses increase investment by $5 billion. Using your computations for the multiplier in the previous question, after businesses increase investment by $5, A7 = 5, what is the change in real GOP?

AY= ____billion

Answer 1

The change in real GDP after businesses increase investment by $5 billion is $25 billion.

Step-by-step explanation:

The change in real GDP after businesses increase investment by $5 billion can be calculated using the multiplier effect. The multiplier is the reciprocal of the marginal propensity to consume (MPC), which is given as 0.80. The formula for the multiplier is 1/(1-MPC). Therefore, the multiplier is 1/(1-0.80) = 5. Using this multiplier, the change in real GDP is equal to the initial change in investment multiplied by the multiplier. In this case, the change in real GDP is $5 billion x 5 = $25 billion.