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Investment Spending and GDP Change
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If the marginal propensity to save (MPS) is 0.2, what is the minimum increase in investment spending needed to raise GDP by $200 billion?

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Choose the Best Answer

A

$40 billion

B

$200 billion

C

$25 billion

D

$160 billion

Understanding the Answer

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Answer

The marginal propensity to save (MPS) tells us how much of each additional dollar earned is saved rather than spent. If the MPS is 0. 2, this means that people save 20 cents of every extra dollar and spend 80 cents, which is the marginal propensity to consume (MPC). To find out how much investment spending is needed to raise GDP by $200 billion, we can use the formula that relates the change in GDP to the change in investment spending and the multiplier effect. The multiplier is calculated as 1 divided by the MPS, so in this case, it is 1 / 0.

Detailed Explanation

When people save 20% of their income, they spend 80%. Other options are incorrect because This answer suggests that we need to invest the same amount as the GDP increase; This option is too low.

Key Concepts

Investment Spending
GDP Change
Multiplier Effect
Topic

Investment Spending and GDP Change

Difficulty

easy level question

Cognitive Level

understand

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