Consider the simplest macro model with demand-determined output.Suppose an increase in business confidence leads firms to increase investment in new equipment by $100 million.The marginal propensity to spend in this economy is 0.75.What is the eventual total new expenditure in this economy due to the increase in investment?
A)$75 million
B)$100 million
C)$25 million
D)$500 million
E)$400 million

Question

Quizplus · Accepted Answer

The total new expenditure is calculated using the spending multiplier, which is 1/(1-MPC). With an MPC of 0.75, the multiplier is 4. Thus, the total increase in expenditure is 4 times the initial investment of $100 million, resulting in $400 million.

Consider the Simplest Macro Model with Demand-Determined Output