If the marginal propensity to consume (MPC) is 0.75, a $50 decrease in government spending, other things being equal, would cause equilibrium real GDP to:
A) increase by $50.
B) decrease by $50.
C) increase by $200.
D) decrease by $200.

Question

Quizplus · Accepted Answer

The multiplier effect formula is 1/(1-MPC). With an MPC of 0.75, the multiplier is 4. A $50 decrease in government spending would thus decrease equilibrium real GDP by 4 times $50, which is $200.

If the Marginal Propensity to Consume (MPC) Is 0