If the MPC is .67 and investment spending decreases by $25 billion, then what would be the equilibrium GDP?

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To understand the relationship between investment spending and the equilibrium GDP, the MPC (or "marginal propensity to consume") is used. This number relates directly between the amount of cash that investors infuse into the economy and the overall GDP. To find the resulting effect on the GDP, you first must calculate the economic multiplier, as follows.

Multiplier (M) = 1/(1-MPC)

M = 1/(1-0.67), or 3.0303

The multiplier equals the ratio of the change in GDP to the change in investment spending.

M = (GDP change)/(investment change)

3.0303 = (GDP change)/25 billion.

25 billion * 3.0303 = GDP change = 75.75 billion.

Therefore, the GDP will decrease by roughly $76 billion dollars because investors are infusing $25 billion dollars less into the economy than the equilibrium dictates for that economy.

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