Suppose the MPC is 0.85.If government purchases increase by $10 billion and net taxes fall by $10 billion,equilibrium output will
A) fall by $10 billion
B) increase by $10 billion
C) increase by $20 billion
D) increase by $66.7 billion
E) increase by $123.3 billion

Question

Quizplus · Accepted Answer

The multiplier is 1/(1-MPC) = 1/(1-0.85) = 6.67. So, a $10 billion increase in government purchases and a $10 billion decrease in net taxes will lead to an increase in equilibrium output of $10 billion * 6.67 = $66.7 billion.

Suppose the MPC Is 0