Question

An economy has no imports or income taxes. The MPC is 0.75 and real GDP is​ $120 billion. Businesses increase investment by​ $4 billion. The expenditure multiplier is​ ________ and the change in real GDP from the increase in investment is​ ________ billion.

Answer 1

The expenditure multiplier is 4 and the change in real GDP from the increase in investment is $16 billion.

Step-by-step explanation:

To calculate the investment multiplier we use the following formula:

expenditure multiplier = 1 / (1 - MPC) = 1 / (1 - 0.75) = 1 / 0.25 = 4

the increase of the GDP = increase in spending x multiplier = $4 billion x 4 = $16 billion