If the marginal propensity to consume is 0.75 and investment spending increases by $200 billion,by how much will equilibrium output increase?
A) $350 billion
B) $150 billion
C) $200 billion
D) $266.7 billion
E) $800 billion

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC) = 1/(1-0.75) = 4. The increase in equilibrium output is the multiplier times the increase in investment, so 4 * $200 billion = $800 billion.

If the Marginal Propensity to Consume Is 0