If the MPC is 0.4,the initial impact of an increase of $10 billion in government purchases will be to cause a(n):
A)$4 billion rise in the economy's output
B)$10 billion rise in the economy's output
C)extra $6 billion in withdrawals
D)extra $10 billion in withdrawals
E)extra $4 billion in injections

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/MPC (where MPC is the marginal propensity to consume). In this case, the multiplier is 1/0.4 = 2.5.

Therefore, an increase of $10 billion in government purchases will result in a $25 billion increase in total output.

Since the initial impact is $10 billion, the total increase in output will be $10 billion x 2.5 = $25 billion.

So it is the Choice B.

If the MPC Is 0