If the MPC in an economy is 0.75 and aggregate expenditures increase by $5 billion, then equilibrium GDP will increase by
A)$3.75 billion.
B)$6.7 billion.
C)$8.75 billion.
D)$20 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.75, the multiplier is 4. Therefore, an increase in aggregate expenditures of $5 billion will increase equilibrium GDP by 4 * $5 billion = $20 billion.

If the MPC in an Economy Is 0