Consider the simplest macro model with a constant price level and demand-determined output.If the business community decreases its planned investment expenditures by $4 billion,causing equilibrium national income to fall by $12 billion,the marginal propensity to spend must be
A)1/3.
B)1/2.
C)2/3.
D)4/5.
E)3.

Question

Quizplus · Accepted Answer

The marginal propensity to spend (MPS) is the fraction of each additional dollar of national income that is spent. It can be calculated as the change in consumption (or total spending) divided by the change in national income.

In this case, since the equilibrium national income fell by $12 billion due to a decrease in investment of $4 billion, the multiplier (1/MPS) must be 3. Therefore, MPS = 1/3.

Consider the Simplest Macro Model with a Constant Price Level