Figure 23-3
-Refer to Figure 23-3.Suppose that government spending increases,shifting up the aggregate expenditure line.GDP increases from GDP1 to GDP2,and this amount is $200 billion.If the MPC is 0.8,then what is the distance between N and L or by how much did government spending change?
A)$16 billion
B)$40 billion
C)$200 billion
D)$1,000 billion

Question

Figure 23-3 
-Refer to Figure 23-3.Suppose that government spending increases,shifting up the aggregate expenditure line.GDP increases from GDP1 to GDP2,and this amount is $200 billion.If the MPC is 0.8,then what is the distance between N and L or by how much did government spending change?
A)$16 billion 
B)$40 billion 
C)$200 billion 
D)$1,000 billion

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.8, the multiplier is 5. Therefore, the change in GDP ($200 billion) divided by the multiplier (5) gives the change in government spending, which is $40 billion.

Figure 23-3 -Refer to Figure 23-3.Suppose That Government Spending Increases,shifting Up the Increases,shifting