If the government decreases its purchases of goods and services by $12,000 and the MPS is 0.5, GDP and income will eventually decrease by
A) $2,400.
B) $6,000.
C) $24,000.
D) $60,000.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/MPS, which is 1/0.5 = 2. A decrease in government spending of $12,000 with a multiplier of 2 leads to a total decrease in GDP and income of $12,000 * 2 = $24,000.

If the Government Decreases Its Purchases of Goods and Services