If nonincome-determined spending increases by $40 billion, and 80 percent of additional income received is spent, the level of economic activity will increase by:
A) $32.0 billion.
B) $72.0 billion.
C) $200.0 billion.
D) $320.0 billion.

Question

Quizplus · Accepted Answer

The increase in economic activity can be calculated using the multiplier effect formula: 1/(1-MPC) * Change in spending, where MPC (marginal propensity to consume) is 0.8 in this case. So, the multiplier is 1/(1-0.8) = 5. Therefore, the total increase in economic activity is 5 * $40 billion = $200 billion.

If Nonincome-Determined Spending Increases by $40 Billion, and 80 Percent