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defon
3 years ago
13

Suppose business decision makers become more optimistic about the future and, as a result, increase their investment spending by

$20 billion. If the economy's marginal propensity to consume is 0.75, the equilibrium level of aggregate real GDP will increase by____________.
Business
1 answer:
Art [367]3 years ago
4 0

Answer:

$80 million

Explanation:

We know that

Multiplier = (1) ÷ (1 - marginal propensity to consume)

                = (1) ÷ (1 - 0.75)

                = (1) ÷ (0.25)

                = 4

Now the GDP would increase by

= Increase in  Investment spending × multiplier effect

= $20 billion × 4

= $80 million increase

We simply multiplied the investment spending increase with the multiplier effect

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