Question

In a closed economy with only lump-sum taxation, if the marginal propensity to consume is equal to 0. 75, a $70 billion increase in government spending could cause a maximum increase in output of.

Answer 1

The maximum increase in output would be $280 billion.

What is the maximum increase in output?

The MPC is known as the marginal propensity to consume. It is the fraction of income that is spent on consumption. The other fraction of income is expected to be saved.

The maximum increase in output = increase in government spending / ( 1 - MPC)

$70 / 0.25 = $280 billion

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