If 75% of additional income received by households was spent, the economy's total output would grow by:
A) 25% of the initial change in nonincome-determined spending.
B) 75% of the initial change in nonincome-determined spending.
C) 1.33 times the initial change in nonincome-determined spending.
D) 4.00 times the initial change in nonincome-determined spending.

Question

Quizplus · Accepted Answer

This is based on the concept of the multiplier effect in economics. The multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume, or the fraction of additional income that households spend rather than save. Here, MPC is 75% or 0.75. Thus, the multiplier is 1/(1-0.75) = 4. This means the total output would grow by 4 times the initial change in nonincome-determined spending.

If 75% of Additional Income Received by Households Was Spent