Question

If the MPC is 0.8 and the government spending decreases by $50 million, then equilibrium GDP will decrease by:

Answer 1

Answer:

$250 million

Explanation:

From the question, we are given that

The MPC is 0.8

Decrement in spending by the government happens to be $50 million

Decrement in equilibrium GDP thus is

Decrement in GDP = Decrement I'm spending / (1 - MPC)

Decrement in GDP = $50 million / (1 - 0.8)

Decrement in GDP = $50 million / 0.2

Decrement in GDP = $250 million

Therefore, we can then conclude that the equilibrium GDP will decrease by $250 million