Scenario 34-1.Take the following information as given for a small,imaginary economy:
• When income is $10,000,consumption spending is $6,500.
• When income is $11,000,consumption spending is $7,300.
-Refer to Scenario 34-1.For this economy,an initial increase of $500 in net exports translates into a
A) $2,000 increase in aggregate demand when the crowding-out effect is taken into account.
B) $2,500 increase in aggregate demand when the crowding-out effect is taken into account.
C) $2,000 increase in aggregate demand in the absence of the crowding-out effect.
D) $2,500 increase in aggregate demand in the absence of the crowding-out effect.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 0.8, calculated from the change in consumption over the change in income. The multiplier is 1/(1-MPC) = 5. Thus, a $500 increase in net exports leads to a $2,500 increase in aggregate demand without the crowding-out effect.