If the MPC = 0.75,a decrease in government spending from $875 billion to $840 billion will decrease real GDP by
A) $26.25 billion.
B) $35 billion.
C) $46.67 billion.
D) $140 billion.

Question

Quizplus · Accepted Answer

The spending multiplier is 1/(1-MPC) = 1/(1-0.75) = 4. The change in government spending is $875 billion - $840 billion = $35 billion. The decrease in real GDP is 4 * $35 billion = $140 billion.