If an initial increase in government spending of $100 billion leads to a total increase of $400 billion in income,the marginal propensity to consume in the economy is
A) 0.4.
B) -0.8.
C) 0.5.
D) 0.75.
E) 0.8.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). Given the total increase in income is $400 billion from an initial $100 billion, the multiplier is 4. Solving 1/(1-MPC) = 4 gives MPC = 0.75.

If an Initial Increase in Government Spending of $100 Billion