If government purchases increased by $60 billion while investment spending decreased by $45 billion, by how much would the level of economic activity change if 80 percent of additional income received was spent?
A) $27 billion decrease.
B) $27 billion increase.
C) $75 billion increase.
D) $525 billion increase.

Question

Quizplus · Accepted Answer

The change in economic activity is calculated using the multiplier effect. The net change in spending is $15 billion ($60 billion increase - $45 billion decrease). The multiplier is 1/(1-MPC), where MPC is 0.8, so the multiplier is 5. The change in economic activity is $15 billion * 5 = $75 billion increase.

If Government Purchases Increased by $60 Billion While Investment Spending