If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should increase government purchases of goods and services by $75 billion.

Question

Quizplus · Accepted Answer

The government spending multiplier is calculated as 1/(1-MPC). With an MPC of 0.75, the multiplier is 4. To increase GDP by $100 billion, government purchases should increase by $25 billion, not $75 billion.

If Policy Makers Want to Increase Real GDP by $100