If the government wishes to increase GDP by $1,200 billion, and the MPC is 0.75, it should _______ its spending by _______ billion.
A) increase; $300
B) decrease; $300
C) increase; $900
D) decrease; $900

Question

Quizplus · Accepted Answer

The government should increase its spending by $300 billion to achieve a $1,200 billion increase in GDP, utilizing the multiplier effect calculated as 1/(1-MPC) = 1/(1-0.75) = 4. Thus, a $300 billion increase in spending multiplied by the multiplier of 4 equals a $1,200 billion increase in GDP.

If the Government Wishes to Increase GDP by $1,200 Billion