If government spending increased by $50 billion and the MPC within the economy was 0.8, what would be the total impact on real GDP?
A)$62.5 billion decrease
B)$62.5 billion increase
C)$250 billion decrease
D)$250 billion increase

Question

If government spending increased by $50 billion and the MPC within the economy was 0.8, what would be the total impact on real GDP?
A)$62.5 billion decrease
B)​$62.5 billion increase
C)​$250 billion decrease
D)​$250 billion increase

Quizplus · Accepted Answer

The formula for calculating the total impact on real GDP is: 
ΔY = ΔSpending / (1-MPC)

Substituting the given values:
ΔY = $50 billion / (1-0.8)
ΔY = $50 billion / 0.2
ΔY = $250 billion increase

Therefore, the correct answer is D) $250 billion increase.

If Government Spending Increased by $50 Billion and the MPC