If government expenditures increase by $20 billion and equilibrium GDP increases by $50 billion as a result, we can conclude that:
A)the expenditures multiplier is 2.
B)the MPC for this economy is .6.
C)inflation is occurring.
D)the MPS for this economy is .6.

Question

Quizplus · Accepted Answer

The expenditures multiplier is calculated as the change in GDP divided by the change in government expenditures, which is $50 billion / $20 billion = 2.5. The formula for the multiplier is 1/(1-MPC), so if the multiplier is 2.5, then 1/(1-MPC) = 2.5, solving for MPC gives MPC = 0.6.

If Government Expenditures Increase by $20 Billion and Equilibrium GDP