If the government wishes to increase GDP by $1,000 billion, and the MPC is 0.6, it should increase its spending by _______ billion.
A) $250
B) $400
C) $600
D) $1,000

Question

Quizplus · Accepted Answer

The government should increase its spending by $400 billion. This is because the multiplier effect is calculated as 1/(1-MPC), which in this case is 1/(1-0.6) = 2.5. To achieve an increase in GDP of $1,000 billion, the government spending should be $1,000 billion / 2.5 = $400 billion.

If the Government Wishes to Increase GDP by $1,000 Billion