If an economy's MPC is 0.8 and the MPM is 0.05, then an increase in government spending of $2,000 will increase income by

Question

Quizplus · Accepted Answer

Using the formula for calculating the change in income (ΔY) from a change in government spending (ΔG):
ΔY = ΔG x [1/(1-MPC(1-MPM))]
ΔY = 2000 x [1/(1-0.8(1-0.05))]
ΔY = 2000 x 5
ΔY = 10,000
Therefore, the increase in government spending of $2,000 will increase income by $10,000. The closest option is B) $8,000, but this is not the correct answer.

If an Economy's MPC Is 0