If the marginal propensity to consume is 0.75 and government purchases of goods and services decrease by $30 billion, real GDP will:
A)increase by $30 billion.
B)increase by $22.5 billion.
C)decrease by $30 billion.
D)decrease by $120 billion.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), which is 1/(1-0.75) = 4. A decrease in government spending by $30 billion will decrease real GDP by 4 times that amount, which is $120 billion.

If the Marginal Propensity to Consume Is 0