Figure 3-7

-In Figure 3-7 above,a $250 increase in AP causes

Question

Figure 3-7
 
-In Figure 3-7 above,a $250 increase in AP causes

Quizplus · Accepted Answer

The $250 increase in autonomous spending (AP) leads to a larger increase in total output (Y) due to the multiplier effect. If the multiplier is 5 (which is common when the marginal propensity to consume is 0.8), a $250 increase in AP results in a $1250 increase in Y. This increase in income leads to an increase in both consumption and saving. Since consumption is a function of income, and saving is the residual of income after consumption, both consumption and saving increase as a result of the increase in Y. Therefore, all of the statements are correct, assuming a multiplier effect is in play.

Figure 3-7 -In Figure 3-7 Above,a $250 Increase in AP Causes