If the government wishes to increase GDP by $1,200b, and the MPC is 0.8, it should:
A) increase its spending by $240b.
B) decrease its spending by $240b.
C) increase its spending by $960b.
D) decrease its spending by $960b.

Question

Quizplus · Accepted Answer

The government spending multiplier is calculated as 1/(1-MPC). With an MPC of 0.8, the multiplier is 5. To achieve a $1,200b increase in GDP, the government should increase spending by $240b ($1,200b / 5).

If the Government Wishes to Increase GDP by $1,200b, and the MPC