Suppose government purchases increase by $200 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.75.What is the total effect of this increase in government purchases?
A)$150 billion
B)$267 billion
C)$800 billion
D)$600 billion

Question

Quizplus · Accepted Answer

The total effect of the increase in government purchases can be calculated using the multiplier effect formula: Multiplier = 1 / (1 - MPC), where MPC is the marginal propensity to consume. Here, MPC = 0.75, so the multiplier = 1 / (1 - 0.75) = 4. The total effect = government purchases increase * multiplier = $200 billion * 4 = $800 billion.

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