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.
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 connelly
Mar 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.