Question

If the marginal propensity to consume (MPC) is 0.8, and transfers increase by $100 billion, then GDP will: Please choose the correct answer from the following choices, and then select the submit answer button. Answer choices increase by more than $500 billion. decrease by less than $200 billion. decrease by less than $500 billion. increase by less than $500 billion.

Answer 1

Increase by more than $500 billion.

Step-by-step explanation:

Use the below formula to find the multiplier effect.

Multiplier = 1 / (1-MPC)

Multiplier = 1 / (1 - 0.8)

Multiplier = 1 / 0.2

Mulitiplier = 5

GDP increase by = 5 x 100

GDP increases by = $500

Since the multiplier is five and the increase in transfer by $100 that will have multiplier effect of $500. Thus option "a" is correct.