Assume that the marginal propensity to consume is 0.75.John's Clean Clones builds a factory that costs $1 billion.How much does the macroeconomic equilibrium increase?
A) $1 billion
B) 0
C) $10 billion
D) $4 billion

Question

Quizplus · Accepted Answer

The increase in equilibrium output can be calculated using the formula:
ΔY = (1/1-MPC) × ΔI
where,
MPC = 0.75
ΔI = $1 billion
ΔY = (1/1-0.75) × $1 billion
ΔY = 4 × $1 billion
ΔY = $4 billion
Therefore, the macroeconomic equilibrium will increase by $4 billion.

Assume That the Marginal Propensity to Consume Is 0