Suppose the government finds it can increase equilibrium real GDP by $45 billion by increasing government purchases by $18 billion.On the basis of this information we can say that the:
A)MPS in this economy is .4.
B)MPC in this economy is .4.
C)MPC in this economy is .3
D)multiplier is 3.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as the change in GDP divided by the change in government spending, which is $45 billion / $18 billion = 2.5. The multiplier is also equal to 1/(1-MPC), so 2.5 = 1/(1-MPC). Solving for MPC gives MPC = 0.6, and MPS = 1 - MPC = 0.4.

Suppose the Government Finds It Can Increase Equilibrium Real GDP