How much will GDP change if firms increase their investment by $8B & the MPC is .80? If mpc is .67?

Question

How much will GDP change if firms increase their investment by $8B & the MPC is .80? If mpc is .67?

Answer 1

ΔY/ΔI=1/(1-MPC)

ΔI=8B

MPC=0.80

ΔY=8B/(1-0.8)=8B/0.2=$+40B

ΔI=8B

MPC=0.67

ΔY=8B/(1-0.67)=8B/0.33=$+24.24B

Answer 2

mpc= 0.80 means investment multiplier is = 1/(1-mpc)= 1/(1-0.8)= 1/0.2= 10/2=5.

So, a an increase in investment of $8B will imply an increase in GDP by 5*$8B =$40B

If, mpc=0.67, mulitiplier is = 1/(1-0.67)= 1/0.33=100/33= 3.

So GDP will increase by 3*$8B = $24B.