If the marginal propensity to save is 0.3 and the marginal propensity to import is 0.1, and the government increases expenditures by $10 billion, ignoring foreign-income repercussions, how much will GDP rise?
A)$20 billion.
B)$10 billion.
C)$25 billion.
D)$15 billion.

Question

Quizplus · Accepted Answer

The multiplier formula is 1 / (1 - MPC + MPM), where MPC is the marginal propensity to consume and MPM is the marginal propensity to import. Given MPS (marginal propensity to save) is 0.3, we can find MPC as 1 - MPS = 0.7. Plugging into the formula gives us 1 / (1 - 0.7 + 0.1) = 1 / 0.4 = 2.5. Therefore, a $10 billion increase in government expenditures results in a $25 billion increase in GDP.

If the Marginal Propensity to Save Is 0