If $1,000 of additional spending occurs (from investment,say)and the marginal propensity to consume is 0.8,the total effect on the economy is an increase of _____ in income or output.
A) $800
B) $1,000
C) $5,000
D) $8,000

Question

Quizplus · Accepted Answer

The total effect on the economy can be calculated using the spending multiplier, which is 1/(1-MPC). With an MPC of 0.8, the multiplier is 1/(1-0.8) = 5. Therefore, the total increase in income or output is $1,000 * 5 = $5,000.

If $1,000 of Additional Spending Occurs (From Investment,say)and the Marginal