HomeQuestionsEconomicsInvestment Spending and GDP Change
📚 Learning Guide
Investment Spending and GDP Change
easy

A government decides to increase its investment spending by $100 billion to stimulate economic growth. If the marginal propensity to save (MPS) is 0.25, how would you classify the potential impact of this decision on real GDP? Choose the most appropriate category.

Master this concept with our detailed explanation and step-by-step learning approach

Learning Path
Learning Path

Question & Answer
1
Understand Question
2
Review Options
3
Learn Explanation
4
Explore Topic

Choose the Best Answer

A

Increase in GDP due to direct investment only

B

Increase in GDP through the multiplier effect

C

No change in GDP as investment does not affect savings

D

Decrease in GDP due to higher savings rates

Understanding the Answer

Let's break down why this is correct

Answer

When the government increases its investment spending by $100 billion, it can lead to a larger increase in the overall economy, known as real GDP. The marginal propensity to save (MPS) of 0. 25 means that for every extra dollar earned, people save 25 cents and spend 75 cents. This spending creates more income for others, who then spend a portion of that income, continuing the cycle. To find the total impact, we can use the formula for the multiplier effect, which is 1 divided by the MPS.

Detailed Explanation

When the government spends money, it creates jobs and income. Other options are incorrect because This answer suggests that only the initial investment matters; This option thinks investment doesn't affect savings.

Key Concepts

Investment Spending
Multiplier Effect
Marginal Propensity to Save
Topic

Investment Spending and GDP Change

Difficulty

easy level question

Cognitive Level

understand

Ready to Master More Topics?

Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.

Start Learning with SeekhExplore More Investment Spending and GDP Change Questions