Suppose government spending decreases by $100 billion and the marginal propensity to consume (MPC)is 0.8. Given this information, this decrease in government spending will cause a(n)
A)increase in equilibrium real GDP equal to $500 billion.
B)increase in equilibrium real GDP equal to $800 billion.
C)decrease in equilibrium real GDP equal to $500 billion.
D)decrease in equilibrium real GDP equal to $800 billion.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), which is 1/(1-0.8) = 5. A $100 billion decrease in spending results in a $500 billion decrease in GDP (100 billion * 5).

Suppose Government Spending Decreases by $100 Billion and the Marginal