An increase in government expenditures by $100 (unmatched by an increase in taxes)would, if the MPC = 0.90, result in an increase in real GDP by:
A)$1,000.
B)$9,000.
C)$900.
D)$190.
E)inadequate information is given.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC). With MPC = 0.90, the multiplier is 1/(1-0.90) = 10. Therefore, an increase in government expenditures by $100 would increase real GDP by $100 * 10 = $1,000.

An Increase in Government Expenditures by $100 (Unmatched by an Increase