If the MPC in an economy is .9,a $1 billion increase in government spending will ultimately increase consumption by:
A) $1 billion.
B) $0.9 billion.
C) $10 billion.
D) $9 billion.

Question

Quizplus · Accepted Answer

The MPC (Marginal Propensity to Consume) is the proportion of an increase in income that is spent, rather than saved. If the MPC is 0.9, this means that for every additional $1 in income, 90 cents will be spent and 10 cents will be saved.
 
With a $1 billion increase in government spending, this will increase income and in turn, increase consumption. The total increase in consumption will be the MPC multiplied by the increase in income, which is:
 
$1 billion x 0.9 = $900 million
 
Therefore, the answer is D) $9 billion.

If the MPC in an Economy Is