If the government increases spending by $5 million and the MPS=.07 by how many million dollars will the level of Real GDP increased?
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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.
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