The government-purchases multiplier is defined as:

Question

Quizplus · Accepted Answer

The government-purchases multiplier is calculated as 1/(1-MPC). This is because an increase in government purchases leads to an increase in income, which in turn leads to an increase in consumption spending. The MPC (marginal propensity to consume) measures the increase in consumption spending for every additional dollar of income. Therefore, the multiplier is the reciprocal of the fraction that represents the portion of income that is not consumed (1-MPC), which is why the correct answer is D.

The Government-Purchases Multiplier Is Defined As