Ch.12 Keynesian Perspective on MPC and Spending Multiplier (Instructor Note and Appendix)

2. Assume that there is an autonomous increase in investment spending of $20 billion and the MPC is given as 0.4, and assuming taxes, imports, and savings are all equal and no leakages:

a.(2 points) How large is the spending multiplier? (Use the simple multiplier equation to calculate it.)

b.(2 points) How much is the total change in GDP from this autonomous increase in investment spending?

c.(4 points) Do you think a larger or smaller MPC would help the economy, and why? What could be some concerns about the spending multiplier?