Assume that the marginal propensity to consume is 0.75. John's Clean Clones builds a factory that costs $1 billion. How much does the macroeconomic equilibrium increase by?
A) $1 billion
B) $0
C) $10 billion
D) $4 billion

Question

Quizplus · Accepted Answer

The macroeconomic equilibrium increases by the initial investment multiplied by the spending multiplier. The spending multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Here, MPC is 0.75, so the multiplier is 1/(1-0.75) = 4. Therefore, the increase in equilibrium is $1 billion * 4 = $4 billion.

Assume That the Marginal Propensity to Consume Is 0