Suppose government purchases increase by $100 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.8.What is the total effect of this increase in government purchases?
A)$500 billion
B)$400 billion
C)$125 billion
D)$80 billion

Question

Quizplus · Accepted Answer

The total effect of the increase in government purchases can be calculated using the multiplier effect formula: 1/(1 - MPC) = 1/(1 - 0.8) = 5. Therefore, the total effect is 5 times the initial increase in government purchases, which is 5 * $100 billion = $500 billion.

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