Assume an MPC of 0.75.The change in total spending for the economy as a result of a $20 billion new government spending injection would be:
A) $80 billion.
B) $27 billion.
C) $22 billion.
D) $15 billion.

Question

Quizplus · Accepted Answer

The multiplier effect can be calculated as 1/(1-MPC), which in this case is 1/(1-0.75) = 4. Therefore, a $20 billion injection would result in a total spending increase of 20 billion * 4 = $80 billion.