Recently, the level of GDP has declined by $60 billion in an economy where the marginal propensity to consume is 0.75.Aggregate expenditures must have fallen by
A)$45 billion.
B)$30 billion.
C)$15 billion.
D)$60 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), which in this case is 1/(1-0.75) = 4. A $60 billion decline in GDP implies that aggregate expenditures fell by $60 billion / 4 = $15 billion.

Recently, the Level of GDP Has Declined by $60 Billion