If the MPC is 0.8 and government increases spending by $50 million, what will be the demand for goods and services generated by this increase?
A) $10 million
B) $40 million
C) $62.5 million
D) $250 million

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.8, the multiplier is 1/(1-0.8) = 5. Therefore, the total increase in demand is 5 times the initial spending, which is 5 * $50 million = $250 million.

If the MPC Is 0