Question

3. Assume that in an economy with an MPC of 0.8 investment increases by $7 billion. By how much will real GDP increase if the economy fully expands

Answer 1

The real GDP will increase by $35 billion if the economy is fully expand.

Step-by-step explanation:

Marginal propensity to consume (MPC) can be dscribed as the additional expenditure on consumption that is incurred by consumer due to an in national income.

In the question, the following are given:

MPC = 0.8

Increase in investment = $7 billion

We can therefore calculate the multiplier and the amount by which the real Gross Domestic Product (GDP) will increase as follows:

Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 1 / 0.2 = 5

Amount of increase in GDP = Increase in investment * Multiplier = $7 billion * 5 = $35 billion.

Therefore, the real GDP will increase by $35 billion if the economy is fully expand.