Suppose Herbert spends two-thirds of any extra income he receives.And suppose that Herbert engages in new autonomous spending of $10, which causes equilibrium to increase.What is the amount of the equilibrium increase?
A) $6.67
B) $15.00
C) $16.67
D) $30.00

Question

Suppose Herbert spends two-thirds of any extra income he receives.And suppose that Herbert engages in new autonomous spending of $10, which causes equilibrium to increase.What is the amount of the equilibrium increase?  
A) $6.67 
B) $15.00 
C) $16.67 
D) $30.00

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Here, MPC is 2/3, so the multiplier is 1/(1-2/3) = 3. The increase in equilibrium is the multiplier times the autonomous spending: 3 * $10 = $30.

Suppose Herbert Spends Two-Thirds of Any Extra Income He Receives