1 Answer | Add Yours
The correct answer here is C. The increase in government spending that you refer to here will, in the circumstances described, lead to an increase of $71.42 million in real Gross Domestic Product.
This result can be found by using the spending multiplier. The relevant equation in this case is
Multiplier = 1/marginal propensity to save
In this case, the MPS is .07. 1/.07 gives us 14.286. Thus the multiplier for any government spending in this situation is 14.286.
To find the answer to this question, then, we simply calculate $5 million x 14.286. This gives us $71.42 million. Therefore, C is the correct answer.
We’ve answered 317,368 questions. We can answer yours, too.Ask a question