Suppose that the level of GDP increased by $100 billion in a private closed economy where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by
A) $100 billion.
B) $50 billion.
C) $500 billion.
D) $5 billion.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 0.5, which means that for every additional dollar of income, consumers will spend 50 cents and save the other 50 cents. Therefore, when GDP increases by $100 billion, aggregate expenditures (AE) will increase by the total amount spent, which is equal to 0.5 times the increase in GDP. So, AE = 0.5 x $100 billion = $50 billion. Thus, the correct answer is B.

Suppose That the Level of GDP Increased by $100 Billion