Practice Test 2

Given the change in spending described, the federal government increases purchases of goods and services by $50\text{ billion}$ in the short run. Households have a marginal propensity to consume (MPC) of $0.8$, and each round of spending creates income that is partially spent again. Assuming no other leakages besides saving and that prices are sticky, what is the total short-run change in real GDP?

Given the change in spending described, the government increases purchases by $20\text{ billion}$ in the short run. The MPC is $0.75$, and households save the remainder each round. Which statement best explains why the spending multiplier is greater than 1 in this scenario?