Suppose C = 100 + 0.6(Y - T)and T = 200,I = 150,G = 250 and NX = 50.Then,an increase in government purchases from G = 250 to G = 260 will result in an increase in Y (GDP)of

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An increase in government purchases will lead to an increase in aggregate demand, which will in turn lead to an increase in GDP. The multiplier effect states that the increase in GDP will be greater than the initial increase in government purchases. In this case, the increase in government purchases is 10, so the increase in GDP will be 10 * 1/0.4 = 25.