If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should _____ government purchases of goods and services by _____ .
A)increase; $25 billion
B)increase; $33 billion
C)increase; $100 billion
D)decrease; $100 billion

Question

Quizplus · Accepted Answer

The spending multiplier is 1/(1-MPC) = 1/(1-0.75) = 4. To increase GDP by $100 billion, government purchases should increase by $100 billion / 4 = $25 billion.

If Policy Makers Want to Increase Real GDP by $100