In an economy without government purchases, government transfers, or taxes, aggregate autonomous consumer spending is $750 billion, planned investment spending is $300 billion, and the marginal propensity to consume is 0.75. What is the expression for planned aggregate spending?

Question

Quizplus · Accepted Answer

Planned aggregate spending is the sum of autonomous spending (which does not depend on income) and induced spending (which depends on income). Autonomous spending includes both autonomous consumer spending ($750 billion) and planned investment spending ($300 billion), totaling $1,050 billion. The marginal propensity to consume (MPC) is 0.75, which means for every additional dollar of income, consumption increases by 75 cents. However, the part of spending that depends on income (YD) in the equation is the induced spending, which is MPC * YD. Therefore, the correct expression for planned aggregate spending is $1,050 billion (autonomous spending) + 0.75 * YD (induced spending), making option A correct.

In an Economy Without Government Purchases, Government Transfers, or Taxes