If the Marginal Propensity to Consume (MPC) is 0.8, what is the maximum potential change in equilibrium GDP from a $10 billion increase in government spending?

💡 Explanation:

The formula for the spending multiplier (k) is $k = 1 / (1 - text{MPC})$. Given an MPC of 0.8, the multiplier is $k = 1 / (1 - 0.8) = 1 / 0.2 = 5$. The maximum potential change in GDP is calculated as $text{Change in GDP} = k times text{Change in Spending}$. Therefore, $text{Change in GDP} = 5 times $10 text{ billion} = $50 text{ billion}$. This represents the total effect of the initial injection plus the subsequent rounds of induced consumption.