Government purchases rise by $100 billion and the MPC equals 0.75.Assuming that idle resources exist at each expenditure round,and the multiplier is operative,the change in Real GDP equals
A) $40 billion.
B) $75 billion.
C) $400 billion.
D) $750 billion.
E) $250 billion.

Question

Quizplus · Accepted Answer

The multiplier effect formula is 1/(1-MPC), so with an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. Therefore, a $100 billion increase in government purchases would lead to a $400 billion increase in Real GDP (100 billion * 4 = 400 billion).

Government Purchases Rise by $100 Billion and the MPC Equals