If the MPC is 0.75 and investment spending increased by $20 billion, then the increase in GDP will be $

Question

If the MPC is 0.75 and investment spending increased by $20 billion, then the increase in GDP will be $

Answer 1

If the MPC is .75 then the MPS is .25. as MPC + MPS must equal 1.

 

The formula to find the spending multiplier is 1/MPS or 1/1-MPC.

 

1/MPS = 1/.25 = a spending multiplier of 4

 

If investment increases by 20n, then the increase in GDP will be multiplied by 4.

 

20bn x 4 = 80n increase in GDP.