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nadya68 [22]
3 years ago
9

Suppose that a certain country has an MPC of 0.8 and a real GDP of $400 billion. If its investment spending decreases by $5 bill

ion, what will be its new level of real GDP
Business
1 answer:
Lera25 [3.4K]3 years ago
3 0

Answer: $375 billion.

Explanation:

Using the MPC, one can calculate a multiplier that shows how much GDP changes when there is a change in investment.

Multiplier = 1 / ( 1 - MPC)

= 1 / (1 - 0.8)

= 1 / (0.2)

= 5

Change in GDP = change in investment spending * multiplier

= -5 billion * 5

= -$25 billion

New level of GDP = 400 - 25

= $375 billion.

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