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If the marginal propensity to save is 0.25, investment spending is $700 million, and the government increases its purchases of goods and services by $100 million, then real GDP increases by: A. $25 million. B. $175 million. C. $400 million. D. $2,800 million.

Answer :

Answer:

[tex]\Delta Y = $400 million[/tex]

Explanation:

Given data:

marginal propensity = 0.25

investment spending is $700 million

increment in goods by $100 million

we know multiplier is given as

[tex]m = \frac{1}{MPS} [/tex]

   [tex]= \frac{1}{0.25} = 4[/tex]

Increment in GDP is calculated as

[tex]m = \frac{\Delta Y}{\Delta G}[/tex]

where \Delta G is increment in goods

[tex]\Delta Y = 4 \times 100[/tex]

[tex]\Delta Y = $400 million[/tex]

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