The MPC is 0.90 and there are no income taxes or imports.If government expenditures on goods and services increases by $2.0 billion, after the multiplier effect works out, aggregate expenditure increases by
A) $1.8 billion.
B) $2.22 billion.
C) $10 billion.
D) $20 billion.
E) $2.0 billion.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC), which is 1/(1-0.90) = 10. Therefore, an increase in government expenditures by $2.0 billion results in an increase in aggregate expenditure by $2.0 billion * 10 = $20 billion.

The MPC Is 0