If the MPC is 0.9, and the government cuts spending by $200 billion, the overall effect on GDP will be:
A) a decrease of $2,000 billion.
B) an increase of $2,000 billion.
C) a decrease of $1,800 billion.
D) an increase of $180 billion.

Question

Quizplus · Accepted Answer

The overall effect on GDP can be calculated using the multiplier effect formula, which is 1/(1-MPC). With an MPC of 0.9, the multiplier is 1/(1-0.9) = 10. Therefore, a government spending cut of $200 billion results in a decrease in GDP of 10 times that amount, or $2,000 billion.

If the MPC Is 0