Refer to the above diagram for a private closed economy.In this economy, aggregate expenditures:
A)do not change as GDP increases.
B)increase by $2 for every $5 increase in GDP.
C)increase by $2 for every $4 increase in GDP.
D)increase by $2 for every $3 increase in GDP.

Question

Refer to the above diagram for a private closed economy.In this economy, aggregate expenditures:
A)do not change as GDP increases. 
B)increase by $2 for every $5 increase in GDP. 
C)increase by $2 for every $4 increase in GDP. 
D)increase by $2 for every $3 increase in GDP.

Quizplus · Accepted Answer

The diagram shows that each time GDP increases by $3, consumption increases by $2. Therefore, the marginal propensity to consume (MPC) is 2/3 or 0.67. This means that for every $1 increase in GDP, aggregate expenditures will increase by $0.67 (which is the multiplier effect). Therefore, aggregate expenditures will increase by $2 for every $3 increase in GDP.

Refer to the Above Diagram for a Private Closed Economy