Question

Assume the marginal propensity to consume is 0.75. What will happen if government spending increases by $100 billion

Answer 1

What will happen if government spending increases by $100 billion is:

Real output will increase by a maximum of $400 billion.

Government spending

Using this formula

Multiplier=1/(1-MPC)

Where:

MPC=Marginal propensity to consume =0.75

Let plug in the formula

Multiplier=1/(1-0.75)

Multiplier=1/0.25

Multiplier=4

Increase in GDP= Government spending ×4

Increase in GDP=$400

Inconclusion what will happen if government spending increases by $100 billion is: Real output will increase by a maximum of $400 billion.

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