Question

How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is 0.80?

Answer 1

Change in GDP = $40 billion

Step-by-step explanation:

given data

increase investment = $8 billion

MPC = 0.80

to find out

Change in GDP

solution

we get here Change in GDP that is express as

Change in GDP = Change in Investment × Expenditure multiplier ..............................1

and here Expenditure multiplier =
`(1)/(1-mpc)`

Expenditure multiplier =
`(1)/(1-0.8)`

so here put value in equation 1

Change in GDP = $8 billion ×
`(1)/(1-0.8)`

Change in GDP = $40 billion