Assume the marginal propensity to consume (MPC) is 0.8 and there is a $200 billion increase in government purchases in an economy, other things constant. In the first round of induced additional consumption, consumption expenditures will increase by:
A)$80 billion.
B)$160 billion.
C)$200 billion.
D)$800 billion.
E)$280 billion

Question

Quizplus · Accepted Answer

The induced additional consumption can be calculated as MPC * change in government purchases. Therefore, induced additional consumption will be 0.8 * $200 billion = $160 billion.

Assume the Marginal Propensity to Consume (MPC) Is 0