Question:
Consider an economy where marginal propensity to consume is 0.9. How much will the total output in this economy increase, if the government transfers are increased by Rs. 500 billion?
(1) Rs. 450 billion
(2) Rs. 500 billion
(3) Rs. 3500 billion
(4) Rs. 4500 billion
(5) Rs. 5000 billion
Correct Answer:
(4)
Answer Explanation:
The government transfer multiplier is calculated as MPC / (1 – MPC). With an MPC of 0.9, the multiplier is 0.9 / 0.1 = 9. An increase of Rs. 500 billion in transfers will increase total output by 9 * 500 = Rs. 4,500 billion.
Topic: Fiscal Policy Year: 2023
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