Use the aggregate expenditures model and assume the marginal propensity to consume (MPC)is 0.80. An increase in government spending of $1 billion would result in an increase in GDP of:
A)$0.
B)$0.8 billion.
C)$1.0 billion.
D)$5.0 billion.
E)$8.0 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.80, the multiplier is 1/(1-0.80) = 5. Therefore, an increase in government spending of $1 billion would increase GDP by $1 billion * 5 = $5 billion.

Use the Aggregate Expenditures Model and Assume the Marginal Propensity