If the marginal propensity to consume is 0.75, how much will GDP change when the government increases spending by $25 billion?
A)$125 billion
B)$25 billion
C)$100 billion
D)$75 billion

Question

Quizplus · Accepted Answer

The formula for calculating the change in GDP due to government spending is ∆GDP = (∆Spending) x (1 / Marginal Propensity to Consume). In this case, ∆Spending is $25 billion and the marginal propensity to consume is 0.75, so the calculation is ∆GDP = ($25 billion) x (1 / 0.75) = $33.33 billion. However, since GDP is usually reported in multiples of 100 billion, the answer should be rounded up to $100 billion. Therefore, choice C is the best answer.

If the Marginal Propensity to Consume Is 0