If the marginal propensity to consume (MPC)is 0.8 and there is a desire to increase real GDP by $500 billion, then
A)an increase in autonomous real consumption spending of $500 billion will generate this change.
B)a decrease in autonomous real saving of $500 billion will generate this change.
C)an increase in planned real investment spending of $200 billion will generate this change.
D)an increase in real autonomous spending of $100 billion will generate this change.

Question

Quizplus · Accepted Answer

The spending multiplier is 1/(1-MPC) = 1/(1-0.8) = 5. To increase GDP by $500 billion, autonomous spending must increase by $500 billion/5 = $100 billion.

If the Marginal Propensity to Consume (MPC)is 0