If consumption falls from $600 billion to $575 billion and the marginal propensity to consume is 0.8, then equilibrium income will
A) fall by $25 billion.
B) fall by $125 billion.
C) rise by $25 billion.
D) rise by $125 billion.

Question

Quizplus · Accepted Answer

The formula for the change in equilibrium income is given by ΔY = (ΔC / (1 - MPC)). Plugging in the given values, we get ΔY = ((-25) / (1 - 0.8)) = -125. Therefore, the equilibrium income will fall by $125 billion.

If Consumption Falls from $600 Billion to $575 Billion and the Marginal