Suppose the consumption equation is represented by the following: C = 250 + .75YD.Now assumm government spending increases by 100 for the above economy.Given the above information,we know that equilibrium output will increase by

Question

Quizplus · Accepted Answer

In this consumption equation, the autonomous consumption is 250 and the marginal propensity to consume (MPC) is 0.75.
Therefore, the multiplier is 1/MPS = 1/(1-MPC) = 1/0.25 = 4.
When government spending increases by 100, it will shift the aggregate expenditure function upward by 100.
The new equilibrium output can be calculated as follows:
ΔY = ΔAE × multiplier = 100 × 4 = 400
Therefore, the equilibrium output will increase by 400.

Suppose the Consumption Equation Is Represented by the Following: C