Question

Compared to a country with an MPC of 0.8, a country with an MPC of 0.6 would have to change government expenditures by _________ as much to have the same impact on real GDP.
a. twice.
b. three times.
c. four times.
d. five times.

Answer 1

Answer: a. twice

Explanation:

The impact that government spending will have on GDP is shown by the Multiplier.

Formula is:

= 1 / (1 - MPC)

For the country with an MPC of 0.8:

= 1 / (1 - 0.8)

= 5

For country with MPC of 0.6:

= 1 / (1 - 0.6)

= 2.5

For government spending to be the same, both countries would need a multiple of 5. The only way the second country can get there is by multiplying their MPC by:

= 5 / 2.5

= 2 times

Answer is therefore twice.