Which of the following defines the government purchases multiplier?
A)1/MPC
B)1/(1 - MPC)
C)MPC/(1 - MPC)
D)(1 - MPC)/MPC

Question

Quizplus · Accepted Answer

The government purchases multiplier represents the amount by which an initial increase in government purchases will increase real GDP. The formula for the government purchases multiplier is 1/(1 - MPC), where MPC is the marginal propensity to consume. This is because an increase in government purchases will lead to an increase in income of households, a portion of which will be spent on consumption. The larger the MPC, the greater the multiplier effect, meaning that a given increase in government spending will lead to a larger increase in real GDP.

Which of the Following Defines the Government Purchases Multiplier