If the marginal propensity to save is equal to 0.5 in the simple Keynesian model,then a 10-unit increase in government spending will cause output to rise by
A)5 units.
B)10 units.
C)20 units.
D)25 units.
E)40 units.

Question

Quizplus · Accepted Answer

In the simple Keynesian model, the multiplier is equal to 1/(1-MPC). Therefore, in this case, the multiplier is 1/(1-0.5) = 2. A 10-unit increase in government spending will then cause output to rise by 2 x 10 = 20 units.

If the Marginal Propensity to Save Is Equal to 0