Refer to the information provided in Table 24.7 below to answer the question(s) that follow.
Table 24.7
All Numbers are in $ Million
-Refer to Table 24.7. Suppose the economy is in equilibrium and the government increases spending by $100 million, the new equilibrium output is $________ million

Question

Refer to the information provided in Table 24.7 below to answer the question(s) that follow.
Table 24.7
All Numbers are in $ Million 
-Refer to Table 24.7. Suppose the economy is in equilibrium and the government increases spending by $100 million, the new equilibrium output is $________ million

Quizplus · Accepted Answer

According to the table, the marginal propensity to consume (MPC) is 0.8. Using the formula for the spending multiplier, we can calculate the change in equilibrium output as follows:

Spending multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 5

Change in equilibrium output = Spending multiplier * Change in government spending 
= 5 * $100 million = $500 million

Therefore, the new equilibrium output is the original output of $1,400 million plus the change in equilibrium output, which equals $1,900 million.

Refer to the Information Provided in Table 24