Homework Answers
a) If the MPC is 0.9, What is the spending multiplier?
Spending Multiplier = 1/ (1 - MPC)
Spending Multiplier = 1/ (1 - 0.9)
Spending Multiplier = 1/ (0.1)
Spending Multiplier = 10
b) Now suppose government spending increases by $90 million. By how much will GDP rise?
Rise in GDP = Increase in government spending x Spending Multiplier
Rise in GDP = $90 million x 10
Rise in GDP = $900 million
Basically, this formula explains the magnitude of change in GDP with a change in government spending.
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