APFIVE Government Spending Multiplier Effect
Using the spending multiplier formula (1/MPS), if the marginal propensity to save (MPS) is 0.25, what is the spending multiplier and the resulting change in GDP following a $200 million increase in government spending?
A
The multiplier is 0.25, so GDP increases by $800 million.
B
The multiplier is 4, so GDP increases by $800 million.
C
The multiplier is 0.25, so GDP increases by $50 million.
D
The multiplier is 4, so GDP increases by $200 million.
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