If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP,then the MPC is
A) 0.5.
B) 0.9.
C) 0.8.
D) 0.75.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). Given that the increase in GDP is $50 million for a $10 million increase in spending, the multiplier is 5. Solving 1/(1-MPC) = 5 gives MPC = 0.8.

If an Increase in Autonomous Consumption Spending of $10 Million