A decrease in autonomous investment of $100 that occurs when MPS = 0.25 will lead to a decrease in national income of

Question

Quizplus · Accepted Answer

The decrease in autonomous investment ($100) will lead to a decrease in total expenditure in the economy by $100. This will lead to a decrease in national income through the multiplier effect. The formula for the multiplier effect is given as follows: Multiplier effect = 1/MPS, where MPS is the marginal propensity to save. In this case, MPS = 0.25, so the multiplier effect = 1/0.25 = 4. Therefore, the decrease in autonomous investment of $100 will lead to a decrease in national income of $100 x 4 = $400.

A Decrease in Autonomous Investment of $100 That Occurs When