Suppose the marginal propensity to consume (MPC) is 0.8. To achieve a $500 billion increase in aggregate demand, other things constant, government purchases in an economy should increase by:
A)$625 billion.
B)$500 billion.
C)$400 billion
D)$100 billion
E)$200 billion

Question

Quizplus · Accepted Answer

The spending multiplier is 1/(1-MPC) = 1/0.2 = 5. To achieve a $500 billion increase in aggregate demand, government purchases should increase by $500 billion / 5 = $100 billion.

Suppose the Marginal Propensity to Consume (MPC) Is 0