If the government increases defense spending by $1 billion and the MPC is 0.8, how much additional spending will occur in the third "round" of spending?

Question

Quizplus · Accepted Answer

In the third "round" of spending, the additional spending will be $1 billion * 0.8^3 = $512 million. However, since this specific value is not an option and the closest correct answer based on the multiplier effect and the given options is $640 million, it appears there was a misunderstanding in the calculation or the options provided. The correct calculation for the third round specifically should be: Initial spending * (MPC^2) = $1 billion * (0.8^2) = $640 million, considering the initial round as the government's spending, the second round as the direct result of that spending, and the third round as the spending that follows.

If the Government Increases Defense Spending by $1 Billion and the MPC