If the marginal propensity to consume is 0.85, decreasing government spending by $600 will decrease GDP by $706.

Name: If the marginal propensity to consume is 0.85, decreasing government spending by $600 will decrease GDP by $706.
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Quizplus · Accepted Answer

The decrease in GDP would be calculated using the multiplier effect, which is 1/(1-MPC). With an MPC of 0.85, the multiplier is 1/(1-0.85) = 6.67. A decrease in government spending by $600 would decrease GDP by 600 * 6.67 = $4002.

If the Marginal Propensity to Consume Is 0