Suppose the economy has no income taxes or imports. The MPC equals 0.8. What does the expenditure model predict will be the change in real GDP if investment increases by $200 billion?
What will be an ideal response?
The expenditure multiplier equals , so for the case in the question, the expenditure multiplier equals = = 5.0. The change in real GDP equals the expenditure multiplier multiplied by the change in investment, or 5.0 × $200 billion = $1,000 billion.
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