If the government increases spending by $400 billion, and the MPC is 0.75, the change in GDP will be:
A) $400 billion.
B) $1,600 billion.
C) $300 billion.
D) $1,200 billion.

Question

Quizplus · Accepted Answer

The change in GDP can be calculated using the multiplier effect formula, which is 1/(1-MPC). With an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. Therefore, an increase in spending by $400 billion results in a change in GDP of 400 billion * 4 = $1,600 billion.

If the Government Increases Spending by $400 Billion, and the MPC