Question

If the current MPC = 0.7 and the government uses fiscal policy, increasing spending by $1 billion, what is the projected effect on GDP (using the multiplier)?

A) $3.33 billion
B) $2.67 billion
C) $1.7 billion
D) $700 million

Answer 1

Answer: $3.33 Billion

To determine the projected effect on GDP using the multiplier, we need to calculate the multiplier using the formula:

Multiplier = 1 / (1 - MPC)

Given that the current MPC (Marginal Propensity to Consume) is 0.7, the multiplier would be:

Multiplier = 1 / (1 - 0.7) = 1 / 0.3 = 3.33

Now, we can calculate the projected effect on GDP by multiplying the change in government spending ($1 billion) by the multiplier:

Projected Effect on GDP = Change in Government Spending * Multiplier
= $1 billion * 3.33
= $3.33 billion

Therefore, the projected effect on GDP is $3.33 billion. Hence, the correct answer is

A) $3.33 billion.