Consider the simplest macro model with demand-determined output.Suppose an increase in business confidence leads firms to increase investment in new equipment by $30 million.The marginal propensity to spend in this economy is 0.9.What is the eventual total new expenditure in this economy due to the increase in investment?
A)$3 million
B)$30 million
C)$27 million
D)$270 million
E)$300 million

Question

Quizplus · Accepted Answer

The total new expenditure is calculated using the spending multiplier, which is 1/(1-MPC). Here, MPC is 0.9, so the multiplier is 10. The initial increase in investment is $30 million, so the total new expenditure is 10 * $30 million = $300 million.

Consider the Simplest Macro Model with Demand-Determined Output