If the marginal propensity to consume is 0.8, by how much will total income increase after an initial $200 is spent?
A) $40
B) $160
C) $200
D) $1,000

Question

Quizplus · Accepted Answer

The total increase in income is calculated using the multiplier effect formula, which is 1/(1-MPC). With an MPC of 0.8, the multiplier is 1/(1-0.8) = 5. Therefore, an initial $200 spent will increase total income by 200 * 5 = $1,000.

If the Marginal Propensity to Consume Is 0