Government Spending Multiplier Effect
Assume an economy’s marginal propensity to save (MPS) is 0.25. Following a $200 million increase in government spending, what will be the value of the spending multiplier and the maximum possible change in real GDP?
A
The multiplier is 0.25, so GDP increases by $800 million.
B
The multiplier is 4, so GDP increases by $200 million.
C
The multiplier is 4, so GDP increases by $800 million.
D
The multiplier is 0.25, so GDP increases by $50 million.
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