Question

Suppose equilibrium savings equals $750 billion, and equilibrium GDP equals $3,500 billion. Investment spending rises to $900 billion, and equilibrium level of real GDP increases by $500 billion. Assuming everything else remains constant, the value of the spending multiplier is?

Answer 1

Answer:

Multiplier = 3.33

Explanation:

Investment / Spending Multiplier denotes increase in Income multiple times increase in causal Investment.

Multiplier = Change in Income / Change in Investment = 1 / 1 - MPC

M = ΔY/ΔI = 1/ (1-MPC)

At Equilibrium, Investment = Savings = 750. Change in Investment = 900 - 750 = 150. Change in Income = 500.

M = 500/150 = 3.33

3.33 = 1/(1-MPC)

MPC = 0.70