If the MPC = 0.6 and government purchases increase by $2 trillion,then equilibrium real GDP demanded
A)increases by $5 trillion
B)decreases by the government multiplier
C)increases by $2 trillion
D)decreases by $5 trillion
E)is indeterminate

Question

Quizplus · Accepted Answer

The government spending multiplier is calculated as 1/(1-MPC). With an MPC of 0.6, the multiplier is 1/(1-0.6) = 2.5. Therefore, an increase in government purchases by $2 trillion will increase equilibrium real GDP demanded by 2.5 * $2 trillion = $5 trillion.