Assume the marginal propensity to consume is 0.8.If consumer spending increases by $20 billion, then real GDP will
A)increase by $100 billion.
B)decrease by $100 billion.
C)increase by $16 billion.
D)not change.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) of 0.8 implies a multiplier of 1/(1-MPC) = 1/0.2 = 5. Therefore, an increase in consumer spending by $20 billion will increase real GDP by 5 times that amount, which is $100 billion.

Assume the Marginal Propensity to Consume Is 0