AP Macroeconomics Question 241: Answer and Explanation
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8. If the marginal propensity to consume equals .75 and government spending increases by $100 million, then overall real GDP can be expected to
- A. decrease by $133.33 million.
- B. increase by $133.33 million.
- C. decrease by $400 million.
- D. increase by $400 million.
- E. increase by $75 million.
Correct Answer: D
(D) If the marginal propensity to consume is .75, then the multiplier is 4 ( = 1/(1 - .75)). The increase in government spending gets multiplied by 4 to determine the overall increase in spending and therefore real GDP. 4 x $100 million = $400 million.