A $100 million increase in government spending increases equilibrium GDP by:
A)$100 million.
B)more than $100 million.
C)less than $100 million.
D)zero.

Question

Quizplus · Accepted Answer

The multiplier effect works to amplify the initial change in government spending, as increased government spending leads to increased consumption, which in turn leads to increased production and income. The size of this multiplier effect depends on the marginal propensity to consume (MPC) in the economy. Assuming a moderate MPC, a $100 million increase in government spending would lead to more than $100 million increase in equilibrium GDP, making option B the correct answer.

A $100 Million Increase in Government Spending Increases Equilibrium GDP