In the simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption, suppose when autonomous aggregate expenditures rise by $500 billion, equilibrium real GDP increases by $2,500 billion. Which of the following statements is true?
A) The MPS = 0.8.
B) The MPC = 0.2
C) The MPS = 0.2.
D) The MPC = 5.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as the change in GDP divided by the change in autonomous spending, which is $2,500 billion / $500 billion = 5. The multiplier is also equal to 1/(1-MPC), so 5 = 1/(1-MPC). Solving for MPC gives MPC = 0.8, and since MPS = 1 - MPC, MPS = 0.2.

In the Simple Aggregate Expenditure Model Where All Components of Aggregate