Assume General Motors has decided to build an assembly plant in St. Louis. The plant will employ 1,000 full-time workers at an annual wage of $40,000 each. If the marginal propensity to consume in St. Louis is 2/3, what change in income will result from operation of the plant for one year?

Question

Quizplus · Accepted Answer

The annual income of the 1,000 workers will be 1,000 x $40,000 = $40 million. Since the marginal propensity to consume is 2/3, we can expect that 2/3 of this income will be spent, and 1/3 will be saved. Therefore, the change in income resulting from operation of the plant for one year will be:

$40 million x 2/3 = $26.7 million (consumption)
$40 million x 1/3 = $13.3 million (savings)

The total change in income will therefore be:

$26.7 million + $13.3 million = $40 million.

Therefore, the correct answer is D.

Assume General Motors Has Decided to Build an Assembly Plant