If a $20 billion increase in government expenditures increases equilibrium GDP by $50 billion, then
A)the multiplier is 2.
B)the MPC for this economy is 0.6.
C)inflation is occurring.
D)the MPS for this economy is 0.6.

Question

Quizplus · Accepted Answer

The multiplier is calculated as the change in GDP divided by the change in government spending, which is 50/20 = 2.5. The formula for the multiplier is 1/(1-MPC), so if the multiplier is 2.5, then 1/(1-MPC) = 2.5, solving gives MPC = 0.6.

If a $20 Billion Increase in Government Expenditures Increases Equilibrium