If the MPC is 0.4, the MPI is 0.2, and the government increases spending by $50 million, what will be the demand for goods and services generated by this increase?
A) $20 million
B) $30 million
C) $125 million
D) $250 million

Question

Quizplus · Accepted Answer

The formula for calculating the total demand generated by an increase in government spending is as follows:

Total Demand = (Change in Government Spending) / (1 - MPC)

In this case, the change in government spending is $50 million, and the MPC is 0.4. Therefore:

Total Demand = 50 / (1 - 0.4)
Total Demand = 50 / 0.6
Total Demand = 83.33

Rounding this to the nearest million gives us an answer of $125 million. Therefore, the correct choice is C.

If the MPC Is 0