An Increase in Aggregate Spending with an MPC of 0.8

Explanation:

The Multiplier Effect: The multiplier effect is a concept that describes how an initial change in spending can result in a larger final change in real GDP. It is calculated as 1 divided by the marginal propensity to consume (MPC).

Calculating the Multiplier: In this case, the MPC is given as 0.8. To calculate the multiplier, we use the formula: Multiplier = 1 / MPC. Therefore, the multiplier in this scenario is 1 / 0.8 = 1.25.

Calculating the Increase in Real GDP: To find the total increase in real GDP resulting from the increase in aggregate spending, we multiply the initial increase in spending by the multiplier. In this case, the increase in aggregate spending is 100 million. Therefore, the calculation would be: 100 million * 1.25 = 125 million.

Therefore, given an autonomous increase in aggregate spending of 100 million and an MPC of 0.8, the total increase in real GDP would amount to 125 million.

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