Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Calculate the marginal propensity to save (MPS).
B
Determine the multiplier using the formula 1/(1-MPC).
C
Identify the initial increase in investment spending.
D
Calculate the total increase in real GDP by multiplying the initial investment increase by the multiplier.
Understanding the Answer
Let's break down why this is correct
Answer
When businesses increase their investment spending, they buy more equipment, buildings, or technology. This spending creates jobs and income for workers who build or create these goods, leading to more people having money to spend. As these workers spend their earnings on goods and services, businesses see higher sales and may invest even more to meet the increased demand. For example, if a company invests in new machinery, it might hire more workers, who then spend their wages at local shops. This cycle continues, and the overall economy grows, which is known as the multiplier effect, ultimately leading to an increase in real GDP.
Detailed Explanation
The first step is to identify the initial increase in investment spending. Other options are incorrect because Calculating the marginal propensity to save (MPS) is not the first step; Determining the multiplier comes after knowing the initial investment.
Key Concepts
Investment Spending
Multiplier Effect
Marginal Propensity to Save (MPS)
Topic
Investment Spending and GDP Change
Difficulty
hard level question
Cognitive Level
understand
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