Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is:
A)0.8.
B)1.25.
C)5.
D)4.

Name: Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is: A)0.8. B)1.25. C)5. D)4.
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Question

Quizplus · Accepted Answer

The government spending multiplier is calculated as 1/(1-MPC). With an MPC of 0.8, the multiplier is 1/(1-0.8) = 1/0.2 = 5.

Assume That the Marginal Propensity to Consume Is 0