If the marginal propensity to consume is 0.60, how much will GDP change when the government increases spending by $45 billion?
A)$75 billion
B)$60 billion
C)$45 billion
D)$112.5 billion

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 0.60, which means for every additional dollar received, 60 cents will be spent. The multiplier effect is calculated as 1/(1-MPC), which in this case is 1/(1-0.60) = 2.5. Therefore, an increase in government spending by $45 billion will lead to a GDP increase of 45 billion * 2.5 = $112.5 billion.

If the Marginal Propensity to Consume Is 0