Explain the effect of discretionary increase in government spending of $60 billion on the economy when...
Explain the effect of discretionary increase in government spending of $60 billion on the economy when the economy's marginal propensity to consume is 0.8.
Homework Answers
If the marginal propensity to consume is 0.8 then the multiplier will be K = 1/ 1-MPC
= 1 / 1 - 0.8 = 1 / 0.2 = 5.
The multiplier in the economy is only 5.
An increase of the government spending of $60 billion will lead to an increase in the total GDP by 60 x 5 = $300 billion.
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Explain the effect of discretionary increase in government
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