Final answer:
An increase in government spending by $100 billion with a marginal propensity to consume of 0.8 leads to an expansion of Real GDP by $500 billion due to the multiplier effect.
Step-by-step explanation:
The question relates to the multiplier effect in economics, a key concept in Keynesian economic theory. When the government increases spending by $100 billion with a marginal propensity to consume (MPC) of 0.8, we can calculate the total impact on Real GDP using the spending multiplier formula, which is 1/(1 - MPC). In this case, the multiplier is 1/(1 - 0.8) = 5. Therefore, the government's increase in spending will not just add $100 billion to the economy; it will be multiplied by 5, leading to a total increase in Real GDP of $500 billion.
To summarize the solution to the student's question: If the government purchases of goods and services increase by $100 billion and the marginal propensity to consume is 0.8, Real GDP will expand by $500 billion, which corresponds to option (b) in the provided choices. This expansion is due to the multiplier effect, which indicates that an initial increase in spending can cycle through the economy and have a larger impact than the initial amount spent.