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5 November, 15:22

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?

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  1. 5 November, 17:16
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    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
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