-Suppose lower expectations lead to a decrease of $240 in desired investment in the economy and the marginal propensity to consume is 0.75.Complete Table 10.2 by calculating the spending cycles as the impact of the decreased investment spending works its way through the economy.In Table 10.2,what will be the total decrease in aggregate demand resulting from the initial $240 decrease in investment expenditure after an infinite number of cycles?
A)-$960.00.
B)-$135.00.
C)-$555.00.
D)-$240.00

Question

-Suppose lower expectations lead to a decrease of $240 in desired investment in the economy and the marginal propensity to consume is 0.75.Complete Table 10.2 by calculating the spending cycles as the impact of the decreased investment spending works its way through the economy.In Table 10.2,what will be the total decrease in aggregate demand resulting from the initial $240 decrease in investment expenditure after an infinite number of cycles?
A)-$960.00. 
B)-$135.00. 
C)-$555.00. 
D)-$240.00

Quizplus · Accepted Answer

Using the spending multiplier formula of 1/(1-MPC), we get a multiplier of 4. So the initial decrease in investment spending of $240 will result in a total decrease in aggregate demand of -240*4 = -$960.00 after an infinite number of cycles.

-Suppose Lower Expectations Lead to a Decrease of $240 in Desired