If the amount of spending in an economy declines by $1,000 and the marginal propensity to consume is 0.8, the effect on the economy is a change of _____ in income or output.
A) $800
B) $1,000
C) $1,000.0
D) $5,000

Question

Quizplus · Accepted Answer

The correct answer is based on the multiplier effect formula, which is 1/(1-MPC). With an MPC of 0.8, the multiplier is 1/(1-0.8) = 5. Therefore, a $1,000 decline in spending leads to a $5,000 decrease in income or output, as the multiplier effect amplifies the initial change in spending throughout the economy.

If the Amount of Spending in an Economy Declines by $1,000