Suppose the marginal propensity to consume is 0.8. A $20 billion increase in government spending shifts the IS curve

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 0.8, meaning for every additional dollar of income, consumption increases by 80 cents. The multiplier effect is calculated as 1/(1-MPC), which in this case is 1/(1-0.8) = 5. Therefore, a $20 billion increase in government spending results in a total increase in demand of 20 billion * 5 = $100 billion, shifting the IS curve to the right by $100 billion.

Suppose the Marginal Propensity to Consume Is 0