If a $100 billion decrease in investment spending causes income to decline by $100 billion in the ﬁrst round of the multiplier process and by $75 billion in the second round, income will eventually decline
By
A) $200 billion.
B) $300 billion.
C) $400 billion.
D) $500 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. If the initial decrease in investment spending is $100 billion, and the multiplier is 4, then the total decrease in income will be $400 billion (4 x $100 billion). Therefore, the correct answer is C, $400 billion.

If a $100 Billion Decrease in Investment Spending Causes Income