Suppose the MPC = 0.6? What will be the government spending multiplier? If, in this

Question

economy, government spending (G) increases by $20, what will happen to Total Spending?

Answer 1

The government spending multiplier can be calculated as:

Government Spending Multiplier = 1 / (1 - MPC)

In this case, since the MPC is 0.6, the government spending multiplier will be:

Government Spending Multiplier = 1 / (1 - 0.6) = 1 / 0.4 = 2.5

So, the government spending multiplier is 2.5.

If government spending (G) increases by $20, we can calculate the change in Total Spending using the government spending multiplier as follows:

Change in Total Spending = Government Spending Multiplier * Change in Government Spending

Change in Total Spending = 2.5 * $20 = $50

Therefore, if government spending increases by $20, Total Spending will increase by $50.