A country is closed.It has no government sector,and its aggregate price levels and interest rates are fixed.Furthermore,the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD,where YD is disposable income and C is consumption.Assume that planned investment equals 75.If this country's income increased by $10 000,consumption would increase by:

Question

Quizplus · Accepted Answer

The equation for calculating the change in consumption due to a change in income is given by the marginal propensity to consume (MPC), which is 0.75 in this case, multiplied by the change in disposable income (ΔYD). 
ΔC = MPC x ΔYD
Since planned investment equals 75, we can calculate the equilibrium level of income (Y*) as follows:
Y* = C + I
Y* = (200 + 0.75Y*) + 75
Y* = 600
An increase in income of $10,000 would raise Y* to $10,600, leading to a change in disposable income of $10,000. Therefore, 
ΔC = 0.75 x $10,000 = $7,500. 
Hence, the answer is B.

A Country Is Closed