If planned aggregate expenditure rises by $10 billion and the marginal propensity to consume is 0.8,then the income-expenditure equilibrium increases by $50 billion.

Question

Quizplus · Accepted Answer

Planned aggregate expenditure (PAE) = C + I + G + NX
PAE rises by $10 billion, and the marginal propensity to consume (MPC) is 0.8.
Therefore, the initial increase in expenditure will lead to a further increase in aggregate demand through the multiplier effect:
ΔY = (1 / (1 - MPC)) x ΔPAE
ΔY = (1 / (1 - 0.8)) x $10 billion
ΔY = $50 billion. 
Therefore, the income-expenditure equilibrium increases by $50 billion.

If Planned Aggregate Expenditure Rises by $10 Billion and the Marginal