Suppose government purchases increase by $100 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.9.What is the total effect of this increase in government purchases?
A)$90 billion
B)$111 billion
C)$900 billion
D)$1000 billion

Question

Quizplus · Accepted Answer

The total effect of the increase in government purchases can be calculated using the multiplier effect formula, which is 1/(1 - MPC), where MPC is the marginal propensity to consume. With an MPC of 0.9, the multiplier is 1/(1 - 0.9) = 10. Therefore, the total effect is $100 billion * 10 = $1000 billion.

Suppose Government Purchases Increase by $100 Billion, That There Is