If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should increase government transfers by $75 billion.

Question

Quizplus · Accepted Answer

The correct increase in government transfers should be $25 billion, not $75 billion, because the spending multiplier is 1/(1-MPC) = 4, so $25 billion in transfers will lead to a $100 billion increase in GDP.

If Policy Makers Want to Increase Real GDP by $100