If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then
A)the MPC is 0.2.
B)the MPC is 0.5.
C)the MPC is 0.75.
D)the MPC is 0.8.
E)the MPC is 0.9.

Question

Quizplus · Accepted Answer

The multiplier effect formula is 1/(1-MPC) = Change in GDP / Change in autonomous spending. Given a $50 million increase in GDP from a $10 million increase in autonomous spending, the multiplier is 5 (50/10). Solving 1/(1-MPC) = 5 gives MPC = 0.8.

If an Increase in Autonomous Consumption Spending of $10 Million