Question

If the marginal propensity to consume (c) is 0.75, an increase in government spending of \[\Delta G = 250\] will raise equilibrium income by:

Options

• 250

• 750

• 1000

• 333.33

Answer 1

The multiplier is \[\frac{1}{1-0.75}=\frac{1}{0.25}=4\]. Applying \[\Delta Y=\frac{1}{1-c}\Delta G\], we get \[\Delta Y = 4 \times 250 = 1000\]. A higher MPC yields a larger multiplier.