If the government increases its purchases of goods and services by $3,000 and the MPC is 0.8, GDP and income will eventually increase by
A) $2,400.
B) $6,000.
C) $15,000.
D) $24,000.

Question

Quizplus · Accepted Answer

The increase in GDP and income can be calculated using the multiplier effect formula, which is 1/(1-MPC). With an MPC of 0.8, the multiplier is 1/(1-0.8) = 5. Therefore, an increase in government purchases of $3,000 will lead to an eventual increase in GDP and income of 3,000 * 5 = $15,000.

If the Government Increases Its Purchases of Goods and Services