Suppose a $30 billion increase in government purchases increased GDP by $120 billion,what is the value of the MPC?
A) 4.00
B) 0.75
C) 0.25
D) 0.50
E) 0.33

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as the change in GDP divided by the change in government spending. Here, the multiplier is $120 billion / $30 billion = 4. The formula for the multiplier is 1/(1-MPC), so 4 = 1/(1-MPC). Solving for MPC gives MPC = 0.75.

Suppose a $30 Billion Increase in Government Purchases Increased GDP