Asked by Daveon Davis on Mar 10, 2024

Verified

# If the MPC is 3/5 then the multiplier is

A) 4, so a $100 increase in government spending increases aggregate demand by $400.

B) 1.5, so a $100 increase in government spending increases output by $150.

C) 2.5, so a $100 increase in government spending increases aggregate demand by $250.

D) 1.67, so a $100 increase in government spending increases output by $166.67.

MPC

Marginal Propensity to Consume, which is the proportion of any additional income that a consumer spends on goods and services.

Multiplier

An economic factor that quantifies the additional effects of a change in spending on the total economic activity.

- Explain the Marginal Propensity to Consume (MPC) and its role in determining the multiplier effect.

Verified Answer

TC

terri connellyMar 10, 2024

Final Answer :

C

Explanation :

The multiplier is calculated as 1/(1-MPC). With an MPC of 3/5, the multiplier is 1/(1-3/5) = 1/(2/5) = 2.5. Therefore, a $100 increase in government spending increases aggregate demand by $250.

## Learning Objectives

- Explain the Marginal Propensity to Consume (MPC) and its role in determining the multiplier effect.