If the marginal propensity to consume is 0.8 and government transfers decrease by $30 billion, real GDP will decrease by less than $150 billion.

Question

Quizplus · Accepted Answer

The decrease in real GDP is calculated using the spending multiplier, which is 1/(1-MPC). With an MPC of 0.8, the multiplier is 5. A $30 billion decrease in transfers leads to a $30 billion decrease in consumption, reducing GDP by $30 billion * 5 = $150 billion. However, since transfers are not direct spending, the initial impact is less than $30 billion, leading to a GDP decrease of less than $150 billion.

If the Marginal Propensity to Consume Is 0