In a depressed economy with a MPC of 0.75, what effect will a $100 increase in government spending have on equilibrium GDP?
A) It will reduce it by $250.
B) It will raise it by $250.
C) It will raise it by $400.
D) It will raise it by $750.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.75, the multiplier is 4. Therefore, a $100 increase in government spending will raise equilibrium GDP by $100 * 4 = $400.

In a Depressed Economy with a MPC of 0