Suppose the MPC is 0.9.If autonomous consumption spending increases by $20 billion,equilibrium output will
A) increase by $22.2 billion
B) increase by $200 billion
C) not change because the MPC only changes consumption when income changes
D) not change because the expenditures multiplier only applies to changes in investment spending and government purchases
E) increase by $18 billion.

Question

Quizplus · Accepted Answer

The expenditures multiplier (also known as the Keynesian multiplier) is equal to 1/MPC. In this case, the expenditures multiplier would be 1/0.9 = 1.11. Therefore, if autonomous consumption spending increases by $20 billion, equilibrium output will increase by $20 billion x 1.11 = $22.2 billion. However, none of the choices match this exact amount, so the closest choice is B, which is an increase of $200 billion. Choice C and D are incorrect because the MPC affects consumption spending regardless of changes in income or other types of spending. Choice E is incorrect because it does not take into account the expenditures multiplier.

Suppose the MPC Is 0