Using Keynesian multiplier, MPC= 0.8 and government spending increased by 40 billion dollars. How much will GDP increased?
A)100 billion dollars
B)200 billion dollars
C)300 billion dollars
D)500 billion dollars

Question

Quizplus · Accepted Answer

The Keynesian multiplier is calculated as 1/(1-MPC). With MPC=0.8, the multiplier is 1/(1-0.8) = 5. Therefore, an increase in government spending by 40 billion dollars will increase GDP by 40 billion * 5 = 200 billion dollars.

Using Keynesian Multiplier, MPC= 0