ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Suppose the government increases its spending by $100 billion as a stimulus package. If the MPC is 0.6, then GDP will:
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decrease by $250 billion.
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increase by $250 billion.
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increase by $600 billion.
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decrease by $400 billion.
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increase by $400 billion.
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Explanation:
Detailed explanation-1: -Therefore, the investment multiplier is 2.5.
Detailed explanation-2: -To calculate the maximum change in GDP, use the spending multiplier. The formula for the spending multiplier is 1/MPS or 1/(1-MPC). In the example above, the multiplier would be 5 (1/. 2).
Detailed explanation-3: -If the MPC is 0.9 and investment spending increases by $20 billion, real GDP will increase by $200 billion.
Detailed explanation-4: -The Spending Multiplier can be calculated from the MPC or the MPS. Multiplier = 1/1-MPC or 1/MPS
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