If the multiplier in the economy is 2.4 and government spending rises by $1.5 trillion, then GDP will change by about:
A)$1.5 trillion.
B)$3.6 trillion.
C)$1.6 trillion.
D)$2.4 trillion.

Question

Quizplus · Accepted Answer

The formula for the multiplier effect is: 
Multiplier = 1/ (1-MPC) 
Where MPC is the marginal propensity to consume. 
Assuming a MPC of 0.6 (typical for the US economy), 
Multiplier = 1/(1-0.6) = 2.5 (approximately) 
Therefore, a change in government spending of $1.5 trillion will result in a change in GDP of approximately: 
Change in GDP = Multiplier x Change in Government Spending 
Change in GDP = 2.5 x $1.5 trillion 
Change in GDP = $3.75 trillion (approximately) 
So the closest option is B, which is $3.6 trillion.

If the Multiplier in the Economy Is 2