If the marginal propensity to consume equals 0.75,then based on the simple model presented in this chapter,one would expect a $100 decrease in investment spending to lead to a total _____ in spending of _____.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) of 0.75 means that for every $1 decrease in investment spending, consumers will reduce their spending by $0.75. Using the simple model, we can calculate the total decrease in spending by dividing the initial decrease in investment spending by the MPC: $100/0.75 = $133.33. Therefore, we would expect a total decrease in spending of $133.33, which is closest to choice D, decrease by $400.

If the Marginal Propensity to Consume Equals 0