Assume the MPC is 0.80. The change in total spending for the economy due to a $200 billion government spending increase is:
A. $160 billion.
B. $200 billion.
C. $800 billion.
D. $1,000 billion.
The value of the multiplier is equal to 1 divided by 1 minus the marginal propensity to consume. If the MPC is .8, the multiplier is 5. The amount that AD increases from fiscal stimulus is equal to the multiplier times the new spending injection or fiscal stimulus. So if the government increases spending by $200 billion, the total change in spending will by $1000 billion (5 × 200).