If business investment spending increased by $40 billion, and 75 percent of additional income received was spent, the level of economic activity would increase by:
A) $70.0 billion.
B) $160.0 billion.
C) $190.0 billion.
D) $300.0 billion.

Question

Quizplus · Accepted Answer

This scenario can be analyzed using the concept of the multiplier effect in economics. The multiplier effect shows how initial increases in spending lead to further increases in income and consumption, thus amplifying the initial spending. The formula for the multiplier is 1/(1-MPC), where MPC is the marginal propensity to consume, or the fraction of additional income that households spend on consumption. In this case, MPC is 75% or 0.75. Therefore, the multiplier is 1/(1-0.75) = 4. The initial increase in spending is $40 billion, so the total increase in economic activity is 4 * $40 billion = $160 billion.

If Business Investment Spending Increased by $40 Billion, and 75