The economy is in a recession. The government enacts a policy to increase purchases by $2 billion. The MPC is 0.8. What would be the full increase in real GDP from the change in government purchases at a given price level

Change in Government consumption = $10,000,000,000

Explanation:

Given:

Government consumption = $2,000,000,000

MPC = 0.8

Change in Government consumption = ?

Computation of Change in Government consumption:

Multiplier factor (K) = 1 / (1 - MPC)

Multiplier factor (K) = 1 / (1 - 0.80)

Multiplier factor (K) = 1 / (0.20)

Multiplier factor (K) = 5

Change in Government consumption = Government consumption * Multiplier factor

Change in Government consumption = $2,000,000,000 * 5

Change in Government consumption = $10,000,000,000