If the autonomous level of spending is equal to $5000 billion, and the marginal propensity to expend decreases from .5 to .4, the equilibrium level of national income will
A) increase from $10000 billion to $12500 billion.
B) decrease from $10000 billion to $8333 billion.
C) decrease from $2500 billion to $2000 billion.
D) increase from $2500 billion to $3000 billion.

Question

Quizplus · Accepted Answer

The equilibrium level of national income is determined by the formula Y = A / (1 - MPC), where Y is the national income, A is the autonomous level of spending, and MPC is the marginal propensity to consume (or expend in this context). Initially, with MPC = 0.5, the equilibrium income is Y = 5000 / (1 - 0.5) = $10000 billion. When MPC decreases to 0.4, the new equilibrium income is Y = 5000 / (1 - 0.4) = $8333 billion. Therefore, the equilibrium level of national income decreases from $10000 billion to $8333 billion.

If the Autonomous Level of Spending Is Equal to $5000