If MPC is .07 and a decrease in the interest rate causes investment spending to increase by $4 billion, using the simple spending multiplier what impact does the change have on real GDP?
In order to understand what impact this action has on gross domestic product (GDP), we must first determine what the multiplier is in this situation. The formula for the multiplier is
Spending multiplier = 1/(1-MPC).
Since you have given us the MPC (marginal propensity to consume), we can calculate the multiplier. Using the figure given for MPC, we have...
(The entire section contains 176 words.)
check Approved by eNotes Editorial