Assume an MPC of 0.6.The change in total spending for the economy as a result of a $10 billion new government spending injection would be:
A) $6 billion.
B) $25 billion.
C) $60 billion.
D) $600 billion.

Question

Quizplus · Accepted Answer

The multiplier effect formula is 1/(1-MPC), so with an MPC of 0.6, the multiplier is 1/(1-0.6) = 2.5. Therefore, a $10 billion injection leads to a total spending increase of $10 billion * 2.5 = $25 billion.