Suppose that the level of GDP increased by $100 billion in an economy where the marginal propensity to consume is 0.5.The initial change in spending must have been:
A)$100 billion.
B)$50 billion.
C)$500 billion.
D)$5 billion.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is the fraction of an increase in income that is spent. In this scenario, the MPC is 0.5, meaning that for every $1 increase in income, $0.50 will be spent. Therefore, if the level of GDP increased by $100 billion, the initial change in spending must have been 0.5 * $100 billion = $50 billion.

Suppose That the Level of GDP Increased by $100 Billion