If the MPC is 0.80, and if the goal is to increase real GDP by $200 million, then by how much would government spending have to change to generate this increase in real GDP?
A) $240 million.
B) $200 million.
C) $180 million.
D) $40 million.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC), which in this case is 1/(1-0.80) = 5. To increase real GDP by $200 million, the government spending change required is $200 million divided by the multiplier, which is $200 million / 5 = $40 million.

If the MPC Is 0