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25 September, 13:30

Suppose that a certain country has an MPC of 0.8 and a real GDP of $500 billion. If its investment spending decreases by $8 billion, what will be its new level of real GDP?

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  1. 25 September, 13:41
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    The answer is $460 billion

    Explanation:

    Multiplier = 1 / (1 - MPC)

    1 / (1 - 0.8) =

    1 / 0.2 = 5

    This means that as investment increases (decreases) by $1, GDP increases (decreases) by $5.

    Therefore, as investment decreases by $8 billion, real GDP reduces by $8 billion x 5 = $40 billion

    So the new level of real GDP = $ (500 - 40) billion

    = $460 billion
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