Suppose government spending decreases by $10 billion and the marginal propensity to consume (MPC) is 0.8. Given this information, this decrease in government spending will cause a(n)
A) increase in equilibrium real GDP equal to $50 billion.
B) increase in equilibrium real GDP equal to $80 billion.
C) decrease in equilibrium real GDP equal to $50 billion.
D) decrease in equilibrium real GDP equal to $80 billion.

Question

Quizplus · Accepted Answer

The decrease in government spending will lead to a decrease in equilibrium real GDP due to the multiplier effect. The multiplier is calculated as 1/(1-MPC), which in this case is 1/(1-0.8) = 5. Therefore, a $10 billion decrease in government spending will lead to a $50 billion decrease in equilibrium real GDP (10 billion * 5 = 50 billion).

Suppose Government Spending Decreases by $10 Billion and the Marginal