If nonincome-determined spending increases by $200 million, and 25 percent of additional income received is not spent, the level of economic activity will increase by:
A) $25 million.
B) $50 million.
C) $250 million.
D) $800 million.

Question

Quizplus · Accepted Answer

Given that 25% of additional income is not spent, this implies a marginal propensity to consume (MPC) of 75% or 0.75. The multiplier effect formula is 1/(1-MPC). Substituting the given values, we get 1/(1-0.75) = 4. Therefore, an increase in spending of $200 million will lead to an increase in economic activity of 200 million * 4 = $800 million.

If Nonincome-Determined Spending Increases by $200 Million, and 25 Percent