Suppose that an economy is currently experiencing a Contractionary Gap due to a recession. The government decides to help the economy by increasing government spending on roadways and infrastructure projects. It increases government spending by $50 million. If the MPC is 0.75, by now much will Real GDP demanded change?

If the MPC is 0.75 the multiplier will K = 1 / 1 - MPC = 1 / 0.25 = 4.

As the multiplier is 4, any increase in the government will lead to a 4 fold increase in the GDP, here, the government has increase the expenditure by $50 million then total GDP will increase by $200 million.

Explanation:

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