Suppose that MPC = 0.8 and MPI = 0. According to the Keynesian multiplier, an increase of $20 million in government purchases will
A)increase real GDP by $16 million.
B)decrease real GDP by $16 million.
C)increase real GDP by $100 million.
D)decrease real GDP by $100 million.
E)have no impact on real GDP.

Question

Quizplus · Accepted Answer

The Keynesian multiplier formula is 1/(1-MPC). Given that MPI = 0, the multiplier is 1/(1-0.8) = 5. Therefore, an increase in government purchases of $20 million will lead to a $100 million increase in real GDP, as $20 million is multiplied by the multiplier of 5.

Suppose That MPC = 0