Answer to Question #52328 in Macroeconomics for Ben

Question

Suppose the marginal propensity to consume (MPS) equals 0.20, an increase in autonomous investment of $100 will lead to an increase in real Gross Domestic Product (GDP) by:

Answer 1

Multiplier effect is an effect in economics, in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent. If MPS = 0.20, then multiplier is m = 1/mps = 5, so an increase in autonomous investment of $100 will lead to an increase in real Gross Domestic Product (GDP) by 100*5 = $500.