If autonomous spending rises by $8 billion and the MPC = .75, what is the maximum potential impact on GDP after the full multiplier effect?
A) It increases by $32 billion.
B) It increases by $64 billion.
C) It decreases by $16 billion.
D) It decreases by $10.5 billion.

Question

Quizplus · Accepted Answer

The maximum potential impact on GDP can be calculated using the multiplier formula: 1/(1-MPC). With an MPC of .75, the multiplier is 1/(1-.75) = 4. Therefore, an $8 billion increase in autonomous spending could potentially increase GDP by 4 * $8 billion = $32 billion.

If Autonomous Spending Rises by $8 Billion and the MPC