Government spending increases by $40 billion and the equilibrium level of output increases by $200 billion. The government spending multiplier

Question

Quizplus · Accepted Answer

The government spending multiplier can be calculated as: 
1 / (1 - MPC)
where MPC is the marginal propensity to consume. Since the MPC is not given, we cannot calculate the exact multiplier. However, we know that the equilibrium level of output increased by $200 billion, and this increase is five times larger than the initial increase in government spending ($40 billion), which suggests that the MPC is 0.8 (i.e. 80% of the additional income is spent). Using this value of MPC, we can calculate the multiplier as:
1 / (1 - 0.8) = 5

Government Spending Increases by $40 Billion and the Equilibrium Level