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alisha [4.7K]
4 years ago
12

If the marginal propensity to save is 0.25, investment spending is $700 million, and the government increases its purchases of g

oods and services by $100 million, then real GDP increases by: A. $25 million. B. $175 million. C. $400 million. D. $2,800 million.
Business
1 answer:
daser333 [38]4 years ago
6 0

Answer:

\Delta Y = $400 million

Explanation:

Given data:

marginal propensity = 0.25

investment spending is $700 million

increment in goods by $100 million

we know multiplier is given as

m = \frac{1}{MPS}

   = \frac{1}{0.25} = 4

Increment in GDP is calculated as

m = \frac{\Delta Y}{\Delta G}

where \Delta G is increment in goods

\Delta Y = 4 \times 100

\Delta Y = $400 million

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