An increase in spending of $25 billion increases real GDP from $600 billion to $700 billion.The marginal propensity to consume must be
A)0.25, and the multiplier is 4.
B)0.50, and the multiplier is 2.
C)0.75, and the multiplier is 4.
D)0.80, and the multiplier is 5.

Question

Quizplus · Accepted Answer

The change in GDP is $100 billion, and the change in spending is $25 billion, so the multiplier is 4 ($100 billion / $25 billion). The formula for the multiplier is 1/(1-MPC), so if the multiplier is 4, then MPC must be 0.75.

An Increase in Spending of $25 Billion Increases Real GDP