If non-income-determined spending increases by $40 billion, and 25 percent of additional income is not spent, the level of economic activity will grow by $160 billion.

Question

Quizplus · Accepted Answer

This is based on the multiplier effect, where the multiplier is calculated as 1/(1-MPC) or 1/MPS. Here, MPC (marginal propensity to consume) is 0.75 (since 25% is not spent, 75% is spent), making the multiplier 4 (1/(1-0.75) = 4). Thus, an initial increase in spending of $40 billion leads to a total increase in economic activity of $160 billion (40 billion * 4 = 160 billion).

If Non-Income-Determined Spending Increases by $40 Billion, and 25 Percent