An economy has a fixed price level, no imports, and no income taxes. MPC is 0.8, and real GDP is $150 billion. Businesses increase investment by $2 billion. Calculate the new level of real GDP and explain why real GDP increases by more than $2 billion.

a) $10 billion

b) For example, the investment made by the business in this question would become income in the hands of other transacting economic agents which in turn be re-spent by them.

Explanation:

Expenditure Multiplier is the amount by which the real GDP will change if autonomous expenditure changes by a given amount.

It is calculated as follows: 1/(1-MPC).

MPC is the portion of additional income that is spent. If the MPC is 0.8, then the expenditure multiplier will be = 1/(1-0.8) = 5

Using the information given, if business investment  increase by $2 billion, the resulting change in GDP would be

increase in real GDP =  2 billion × 5 = $10 billion

Explanation of the multiplier change in real GDP

Real GDP increases by more than 2 billion because of the multiplier effect. This effect is implies that expenditures by made by one economic agent in a transaction becomes  income in the hand of another which in turn be re-spent . This will continue in manifolds thereby increasing the total value of goods and services resulting from a single increase in autonomous spending in multiple fold.

For example, the investment made by the business in this question would become income in the hands of other transacting economic agents.

answerthat 50% of all cases go to trial;