If government spending is increased by $500, taxes are reduced by $200, and the MPS is 0.2, equilibrium output will change by

Question

Quizplus · Accepted Answer

The change in equilibrium output is equal to the change in aggregate demand, which is equal to the change in government spending plus the change in taxes multiplied by the multiplier. In this case, the change in government spending is $500, the change in taxes is -$200, and the MPS is 0.2, so the multiplier is 1/(1-MPS) = 1/(1-0.2) = 1.25. Therefore, the change in equilibrium output is (500 - 200) * 1.25 = $3,300.

If Government Spending Is Increased by $500, Taxes Are Reduced