If the MPC is 0.6 and if government purchases and net taxes both increase by $20 billion,by how much will equilibrium output change?
A) It will increase by $80 billion.
B) It will increase by $20 billion.
C) It will not change because the changes in government purchases and net taxes will cancel each other out.
D) It will decrease by $20 billion.
E) It will decrease by $80 billion.

Question

Quizplus · Accepted Answer

The multiplier effect formula is ΔY = MPC × ΔT, where MPC is the marginal propensity to consume and ΔT is the change in government purchases and net taxes. Substituting the values: ΔY = 0.6 × $20 billion = $12 billion. Thus, the equilibrium output will increase by $12 billion, which is the same as the increase in government purchases and net taxes. Therefore, the correct answer is B, it will increase by $20 billion.

If the MPC Is 0