If the marginal propensity to consume is 0.9 in a closed economy, what would be the effect on GDP of a $20 billion decline in investment spending?
1 Answer
Feb 1, 2016
GDP will decline by $200.
Explanation:
There is a decline in investment spending. The decline is $20.
Then the GDP will decline by Multiplier times.
#(DeltaY)/(DeltaI)=1/(1-MPC)#
Where -
#Delta I=20#
#MPC=0.9#
#Delta Y=?#
#(Delta Y)/20=1/(1-0.9)=1/0.1=10#
#Delta Y= 10 xx 20 = 200#
GDP will decline by $200.
