If autonomous investment spending falls by $1,000 and the marginal propensity to consume is 0.75, the total effect on the economy is a decrease of _____ in income or output.
A) $750
B) $1,000
C) $4,000
D) $7,500

Question

Quizplus · Accepted Answer

The total effect on the economy can be calculated using the multiplier formula, which is 1/(1-MPC), where MPC is the marginal propensity to consume. With an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. Therefore, a $1,000 decrease in autonomous investment spending results in a total decrease in income or output of $1,000 * 4 = $4,000.

If Autonomous Investment Spending Falls by $1,000 and the Marginal