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The MPC for an economy is?

If the economy has an MPC of 0.8, by how much will a @0 billion increase in government purchases increase GDP?

  • Answer:

    If MPC = 0.8, then the government spending multiplier is 5 (= 1/(1-0.8)).The multiplier associated with a given change in taxes, the tax multiplier, is negative, because higher taxes reduce people's disposable income, thereby reducing their consumption.

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