Given the MPS = 0.40,with no government and no foreign trade,a $10 billion increase in investment will eventually result in an increase in
A)Consumption by $40 billion.
B)Total spending by $15 billion.
C)Consumption by $15 billion.
D)Total spending by $2.5 billion.

Question

Quizplus · Accepted Answer

The MPC (marginal propensity to consume) is equal to 1 - MPS, which means in this case it is 0.60. This means that for every additional dollar of income, consumers will spend 60 cents and save 40 cents. Therefore, a $10 billion increase in investment will eventually result in a total increase in spending of $25 billion (10/0.40) and an increase in consumption of $15 billion (0.60 x $25 billion).