If the MPC is 0.6, and the government increases spending by $300 billion, the overall effect on GDP will be:
A) a decrease of $750 billion.
B) an increase of $750 billion.
C) a decrease of $550 billion.
D) an increase of $250 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 0.6, the multiplier is 1/(1-0.6) = 2.5. Therefore, an increase in government spending of $300 billion would increase GDP by 2.5 * $300 billion = $750 billion.

If the MPC Is 0