If government decreases its purchases by $20 billion and the MPC is .8,equilibrium GDP will decrease by $100 billion.

Question

Quizplus · Accepted Answer

According to the equation for the expenditure approach to GDP, the change in equilibrium GDP is equal to the change in government purchases multiplied by the multiplier, which is equal to the inverse of the MPC. Therefore, a decrease in government purchases of $20 billion multiplied by a multiplier of 1/0.8 would lead to a decrease in equilibrium GDP of $100 billion.

If Government Decreases Its Purchases by $20 Billion and the MPC