Use the aggregate expenditures model and assume the marginal propensity to consume (MPC)is 0.90. A decrease in government spending of $1 billion would result in a decrease in GDP of:
A)$0.
B)$0.9 billion.
C)$1.0 billion.
D)$9.0 billion.
E)$10.0 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.90, the multiplier is 10. Therefore, a $1 billion decrease in government spending would decrease GDP by $1 billion * 10 = $10 billion.

Use the Aggregate Expenditures Model and Assume the Marginal Propensity