Practice Quiz

Case Interview Prep

Category - Economics

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If the United States’ government spends $30 billion, what is the amount of demand for goods and services if the MPC is ¾?
  1. $30 billion
  2. $90 billion
  3. $120 billion
  4. $180 billion
Explanation
Answer: C - The amount of demand for goods and services is $120 billion.

Key Takeaway: The multiplier effect of the United States government spending is as follows:
Multiplier = 1/(1-MPC) = 1/(1-3/4) = 4. Since the multiplier is 4, the amount of demand for goods and services is the initial amount ($30 billion) multiplied by the multiplier (4) which makes it $120 billion.
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