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The Multiplier in the Simple Model with No Income Taxes The simple government purchase multiplier is...

The Multiplier in the Simple Model with No Income Taxes

The simple government purchase multiplier is given by 1/(1 - MPC). Suppose that the U.S. MPC is 0.9. Calculate the government purchase multiplier. If the U.S. government increases its spending by $100 billion to stimulate the economy devastated by the Coronavirus crisis, how much will U.S. GDP increase in the simple model?

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Answer #1

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Multiplier =1/(1-MPC)

=1/(1-0.9)

=10

the government purchase multiplier is 10

Change in GDP =change in government spending * multiplier

=100*10

=$1000 billion

the GDP increases by $1000 billion

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