Suppose aggregate output is demand- determined. 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)2/5.
B)1/3.
C)1/2.
D)2/3.
E)4/5.

Question

Quizplus · Accepted Answer

If a decrease in investment of $4 billion causes a decrease in national income of $12 billion, the marginal propensity to spend must be 2/3. This is because the multiplier effect in this scenario is 3 (change in national income divided by the initial change in investment), so we can set up the equation: 
$12 billion = 3 x $4 billion x MPC 
Solving for MPC, we get MPC = 2/3.

Suppose Aggregate Output Is Demand- Determined