Suppose the marginal propensity to consume in Economia is 0.75. People feel increasing confidence in their economy and spend $5 billion more on vacations. Equilibrium income will then rise by
A) $4 billion.
B) $5 billion.
C) $20 billion.
D) $75 billion.

Question

Quizplus · Accepted Answer

The increase in equilibrium income can be calculated using the multiplier effect formula, which is 1/(1-MPC), where MPC is the marginal propensity to consume. Here, MPC = 0.75, so the multiplier is 1/(1-0.75) = 4. Therefore, an initial increase in spending of $5 billion leads to a total increase in equilibrium income of 5 billion * 4 = $20 billion.

Suppose the Marginal Propensity to Consume in Economia Is 0