Suppose the marginal propensity to consume in Economia is 0.75. People feel increasing confidence in their economy and spend $5 billion more on vacations. Equilibrium income will rise by:
A) $75 billion.
B) $4 billion.
C) $5 billion.
D) $20 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Here, MPC is 0.75, so the multiplier is 1/(1-0.75) = 4. The increase in spending is $5 billion, so the equilibrium income will rise by 4 * $5 billion = $20 billion.

Suppose the Marginal Propensity to Consume in Economia Is 0