Suppose there are no imports, taxes or other leakages in the economy. If the Marginal Propensity to Consume is .80 and the government increases spending by $40 billion, by how much would output increase in the economy?
Select one:
a. $40 billion
b. $48 billion
c. $80 billion
d. $120 billion
e. $200 billion.
Marginal propensity to consume, MPC = 0.80
Government increases spending by $ 40 billion
Multiplier = 1/MPS = 1/0.2 = 5
Here, the government has increased the spending thus there will be increase in the economy
Increase = Multiplier * Spending = 5*40 = $ 200 billion.
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