Question

Suppose that a financial crisis decreases investment spending by $100 billion and the marginal propensity to consume is 0.80. Assuming no taxes and no trade, by how much will real GDP change

Answer 1

As a result of the decrease in investment spending, the real GDP will change by -$500 billion.

How much will real GDP change by?

The decrease will depend on the multiplier which is found as:

= 1 / ( 1 - Marginal propensity to consume)

= 1 / (1 - 0.8)

= 1 / 0.2

= 5

The change will be:

= Decrease in spending x multiplier

= - 100 x 5

= -$500 billion

In conclusion, real GDP will decrease by $500 billion.

Find out more on Marginal propensity to consume at https://brainly.com/question/17930875.