If the MPC in an economy is 0.9, a $1 billion increase in government spending will ultimately increase consumption by
A)$1 billion.
B)$0.9 billion.
C)$10 billion.
D)$9 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.9, the multiplier is 10. Therefore, a $1 billion increase in government spending will increase consumption by $9 billion (0.9 * $10 billion).

If the MPC in an Economy Is 0