If the marginal propensity to consume is 0.8 and government transfers decrease by $50 million, then equilibrium GDP will decrease by:
A)$40 million.
B)$50 million.
C)$200 million.
D)$250 million.

Question

Quizplus · Accepted Answer

The change in equilibrium GDP is calculated using the spending multiplier, which is 1/(1-MPC). With an MPC of 0.8, the multiplier is 5. A $50 million decrease in transfers results in a $50 million decrease in consumption, leading to a $250 million decrease in GDP (5 x $50 million).

If the Marginal Propensity to Consume Is 0