Suppose that the government increases spending by $100 billion as a stimulus package. If the marginal propensity to consume is 0.6, then real GDP will:

Question

Quizplus · Accepted Answer

The increase in real GDP can be calculated using the multiplier effect formula, which is 1/(1 - marginal propensity to consume). In this case, the multiplier is 1/(1 - 0.6) = 2.5. Therefore, an increase in government spending by $100 billion will increase real GDP by $100 billion * 2.5 = $250 billion.

Suppose That the Government Increases Spending by $100 Billion as a Stimulus