If the MPC is 0.75, and the government cuts spending by $100 billion, the overall effect on GDP will be:
A) a decrease of $400 billion.
B) an increase of $250 billion.
C) a decrease of $250 billion.
D) an increase of $400 billion.

Question

Quizplus · Accepted Answer

The multiplier effect formula is 1/(1-MPC), so with an MPC of 0.75, the multiplier is 4. A $100 billion cut in spending would thus decrease GDP by 4 times that amount, or $400 billion.

If the MPC Is 0