Assume that the MPC = .75. The government of Ecoland announces that it will spend an additional $40 billion on flu shot immunizations this year to counteract a growing flu epidemic. If the full multiplier effect occurs, this spending will lead Ecoland's to:
A) grow by $80 billion.
B) fall by $53.33 billion.
C) grow by $300 billion.
D) grow by $160 billion.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), which is 1/(1-0.75) = 4. Therefore, the total increase in GDP is 4 times the initial spending, which is 4 * $40 billion = $160 billion.

Assume That the MPC =