If the MPC is 0.8, and the government spends an additional $100b, the overall effect on GDP will be:
A) $400b.
B) $500b.
C) $120b.
D) $180b.

Question

Quizplus · Accepted Answer

Given that MPC (marginal propensity to consume) is 0.8, which means that for every extra dollar spent by the government, people will spend 80 cents of it. So, the total increase in spending will be 100/0.2 = $500b (since MPC + MPS = 1). Therefore, the overall effect on GDP will be $500b.

If the MPC Is 0