If government spending rises by 50 and the marginal propensity to consume is 0.9. Using the multiplier eq?

Question

Suppose government spending rise by 50 and the marginal propensity to consume is 0.9. Using the multiplier equation, we can infer that equilibrium output in this case will:

A) rise by 50. B) fall by 500. C) rise by 500. D) fall by 50.

Answer 1

mpc= 0.9 means the multiplier is 1/(1-0.9)= 1/0.1= 10

So, a rise in Govt. spending will increase equlibrium output by 10*50= 500.

The correct answer is C) rise by 500

Answer 2

C) rise by 500.

ΔY/ΔG=1/(1-MPC)

ΔG=+50

ΔY= 50/(1-0.9)=50/0.1= +500