Question

Suppose that a certain country has an MPC of 0.8 and a real GDP of $500 billion. If its investment spending decreases by $8 billion, what will be its new level of real GDP?

Answer 1

The answer is $460 billion

Step-by-step explanation:

Multiplier = 1 / (1 - MPC)

1 / (1 - 0.8) =

1 / 0.2 = 5

This means that as investment increases(decreases) by $1, GDP increases(decreases) by $5.

Therefore,as investment decreases by $8 billion, real GDP reduces by $8 billion x 5 = $40 billion

So the new level of real GDP = $(500 - 40) billion

= $460 billion