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 $12 billion, what will be its new level of real GDP

Answer 1

Based on the MPC and the investment spending amount, the new level of GDP would be $440 billion .

What is the new level of GDP?

First, find the multiple:

= 1 / (1 - 0.8)

= 1 / 0.2

= 5

The change in GDP would be:

= 500 billion - (12 billion x 5)

= $440 billion

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