Assume the marginal propensity to consume is 0.8. If consumer spending increases by $20 billion, then real GDP will:
A) Increase by $100 billion
B) Decrease by $100 billion
C) Increase by $16 billion
D) Will not change

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) of 0.8 implies a multiplier of 1/(1-MPC) = 5. Therefore, an increase in consumer spending by $20 billion will increase real GDP by 5 times that amount, which is $100 billion.

Assume the Marginal Propensity to Consume Is 0