Use the aggregate expenditures model and assume the marginal propensity to consume (MPC) is 0.80. An increase in government spending of $1 billion would result in an increase in GDP of:
A) $0.8 billion.
B) $1.0 billion.
C) $5.0 billion.
D) $8.0 billion.

Question

Quizplus · Accepted Answer

The increase in GDP can be calculated using the multiplier effect formula, which is 1/(1-MPC). With an MPC of 0.80, the multiplier is 1/(1-0.80) = 5. Therefore, an increase in government spending of $1 billion would result in an increase in GDP of $1 billion * 5 = $5.0 billion.

Use the Aggregate Expenditures Model and Assume the Marginal Propensity