If income increases by $10,000,government purchases are fixed at $1,000,investment spending is fixed at $2,000,net exports are fixed at $500,and the marginal propensity to consume is 0.70,by how much does aggregate expenditure increase?
A) $700
B) $2,000
C) $7,000
D) $1,000
E) $1,400

Question

Quizplus · Accepted Answer

The formula for calculating the change in aggregate expenditure due to a change in income is:

Change in aggregate expenditure = Marginal Propensity to Consume x Change in Income

In this case, the change in income is $10,000.

Therefore,

Change in aggregate expenditure = 0.70 x $10,000 = $7,000

Note that the other fixed components of aggregate expenditure (government purchases, investment spending, net exports) do not change in this scenario.

If Income Increases by $10,000,government Purchases Are Fixed at $1,000,investment