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12 September, 11:27

Assume that a country is currently producing at a level of output equal to $600 billion. The government decides to increase expenditures by $25 billion, and the nation's MPC is 0.8. Based on the spending multiplier, what is the nation's new level of total output (in billions of dollars) ?

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  1. 12 September, 11:32
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    According to the Multiplier Effect, the total output will be the sum of the current output plus the increase in expenditures multiplied by a factor.

    The multiplier is given by:

    m = 1 / (1 - MPC)

    Therefore:

    m = 1 / (1 - 0.8) = 1 / 0.2 = 5

    Hence, the new total output will be:

    600 + 5*25 = 725 billion $
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