Question

If, in a recession, the marginal propensity to consume is .80 , then:

a. Real GDP will increase by 5 times of a given increase in government spending
b. Real GDP will decrease by 5 times of a given increase in government spending
c. Real GDP will decrease by 5 times of a given decrease in government taxation
d. Real GDP will increase by 10 times of a given increase in government spending

Answer 1

If the marginal propensity to consume is 0.80 in a recession, the real GDP will increase by 5 times of a given increase in government spending.

Step-by-step explanation:

The marginal propensity to consume (MPC) measures how much of an increase in income a person will spend rather than save. In this case, with an MPC of 0.80, it means that for every additional dollar of income, people will spend 80 cents and save the remaining 20 cents.

Given this information, we can conclude that if there is a given increase in government spending, the real GDP will increase by 5 times. This is because the multiplier effect magnifies the initial increase in spending. For example, if the government spends $100, the initial increase in GDP will be $100, and with a multiplier of 5, the final increase in GDP will be $500.