If the marginal propensity to consume (MPC)is 0.75 and government purchases increase by $200 billion, then
A)equilibrium real Gross Domestic Product (GDP)will increase by $800 billion.
B)equilibrium real Gross Domestic Product (GDP)will increase by $200 billion.
C)equilibrium real Gross Domestic Product (GDP)will increase by $50 billion.
D)the effect on equilibrium real Gross Domestic Product (GDP)cannot be determined from the given information.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.75, the multiplier is 4. Therefore, an increase in government purchases by $200 billion will increase GDP by 4 times $200 billion, which is $800 billion.

If the Marginal Propensity to Consume (MPC)is 0