Question

MC Qu. 115 If the MPC is 0.6, and the government increa... If the MPC is 0.6, and the government increases its spending by $300b, the overall effect on GDP will be: a decrease of $750b. an increase of $750b. a decrease of $550b. an increase of $250b.

Answer 1

The correct answer is option b.

Step-by-step explanation:

The marginal propensity to consume is 0.6.

The government will increase its spending by $300 billion.

The overall GDP will increase by the amount of increase in spending times spending multiplier.

Increase in GDP

=
`(1)/(1-MPC)\ *\ \Delta G`

=
`(1)/(1-0.6)\ *\ 300`

=
`(1)/(0.4)\ *\ 300`

=
`2.5\ *\ 300`

= $750 billion