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

Question

Quizplus · Accepted Answer

The formula for calculating the change in real GDP from a change in government spending is:

Change in real GDP = Change in government spending x (1 / MPC)

Substituting the given values:

$500 = Change in government spending x (1 / 0.80)

Solving for the change in government spending:

Change in government spending = $500 x 0.80 = $400

Since an increase in government spending will lead to an increase in real GDP, the change in government spending should be positive. Therefore, the correct answer is D) +100.