The MPC = 2/3. Autonomous spending rises by $12 million. What is the maximum potential impact on GDP after the full multiplier effect?
A) It decreases by $36 million.
B) It decreases by $20 million.
C) It increases by $20 million.
D) It increases by $36 million.

Question

Quizplus · Accepted Answer

The multiplier effect formula is 1/(1-MPC). With an MPC of 2/3, the multiplier is 1/(1-2/3) = 3. Therefore, a $12 million increase in autonomous spending leads to a maximum potential GDP increase of 3 * $12 million = $36 million.