Question

To achieve a rise of income of 500, given mpc= 0.8, how much should be the rise in government expenditure in a simple keynesian model?

Answer 1

Well, mpc =0.8

Therefore mps = 0.2

Now multiplier = 1/0.2= 5 times

Now 5= 500/change in c

hence government need to spend 100 to give rise of 500 income.