If government increases its purchases by $15 billion and the MPC is 2/3, then we would expect the equilibrium GDP to
A)increase by $30 billion.
B)increase by $45 billion.
C)decrease by $35 billion.
D)increase by $50 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 2/3, the multiplier is 3. Therefore, an increase in government purchases by $15 billion will increase the equilibrium GDP by 15 billion * 3 = $45 billion.

If Government Increases Its Purchases by $15 Billion and the MPC