If the MPC of an economy is 0.90 and the economy has a horizontal aggregate supply curve, then an increase in investment spending of $50 million will increase total income by

Question

Quizplus · Accepted Answer

The multiplier effect formula is 1/(1-MPC), so with an MPC of 0.90, the multiplier is 1/(1-0.9) = 10. Therefore, an increase in investment spending of $50 million will increase total income by 10 times that amount, which is $500 million.

If the MPC of an Economy Is 0