In an economy the marginal propensity to consume is 0.90, and gross domestic product (GDP) is $100 billion. If gross private domestic investment declines by $2 billion, then GDP will

Decrease by a maximum of $20 billion

⬇by a maximum of $20 billion

1.8

To determine the change in GDP due to a change in gross private domestic investment, we need to understand the concept of the marginal propensity to consume (MPC). The MPC is the change in consumption resulting from a change in income. In this case, the MPC is given as 0.90, which means that for every additional dollar of income received, 90% of it will be spent on consumption.

To calculate the change in GDP, we need to apply the concept of the multiplier effect. The multiplier is the ratio of the change in GDP to the initial change in investment. The formula for the multiplier is:

Multiplier = 1 / (1 - MPC)

Plugging in the value for MPC:

Multiplier = 1 / (1 - 0.90) = 1 / 0.10 = 10

This means that for every dollar change in investment, there will be a 10-times change in GDP.

Given that gross private domestic investment declines by $2 billion, we can multiply this change by the multiplier to find the corresponding change in GDP:

Change in GDP = Change in investment * Multiplier
Change in GDP = (-$2 billion) * 10
Change in GDP = -$20 billion

Therefore, if gross private domestic investment declines by $2 billion, GDP will decrease by $20 billion. The new GDP would be $100 billion - $20 billion = $80 billion.