Answer to Question #55041 in Microeconomics for luis smith

Question

If government spending increases by $150 million and the MPC is .8, by how much will GDP increase?

Answer 1

Change in GDP under the influence of government spending is equal to ∆GDP=m(G)*∆G, where m(G) - multiplier of government spending (G)
m(G)=1/(1-MPC)=1/0.2=5 => ∆GDP=5*$150 mln =$750 mln