If MPC = 0.80, how much should government spending change to increase real GDP by $500?
A) -100.
B) +80.
C) -80.
D) +500.
E) +100.

Question

Quizplus · Accepted Answer

The formula for calculating the change in real GDP is ∆Y = (∆Spending) x (1/MPC). Rearranging the formula to solve for ∆Spending, we get ∆Spending = (∆Y) x (MPC/1). Plugging in the given values, we get ∆Spending = ($500) x (0.80/1) = $400. However, the question is asking for the change in government spending required to increase real GDP by $500, so we need to flip the sign and get ∆Spending = -$400. Since government spending needs to increase, the correct answer is +$400 or choice letter E.