Suppose in a simple economy with no foreign sector, the MPC is equal to 0.75. How much government spending (∆G) would be needed to raise output by 100 million?

25 million

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33.3 million

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75 million

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400 million

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Solution

The correct option is A
25 million

The multiplier here is equal to $\frac{1}{1 - 0.75}$ = 4. Hence, to raise output by 100 million, the government must increase spending by an amount equal to $\frac{100}{4}$ million= 25 million.

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Suppose in a simple economy with no foreign sector, the MPC is equal to 0.75. How much government spending (∆G) would be needed to raise output by 100 million?

The correct option is A 25 million The multiplier here is equal to 11−0.75= 4. Hence, to raise output by 100 million, the government must increase spending by an amount equal to 1004million= 25 million.

The correct option is A
25 million

The multiplier here is equal to $\frac{1}{1 - 0.75}$ = 4. Hence, to raise output by 100 million, the government must increase spending by an amount equal to $\frac{100}{4}$ million= 25 million.