If an increase in planned investment of $70 billion causes equilibrium output demanded to rise by $280 billion,the value of the marginal propensity to consume is
A)4
B)4/3
C)1/3
D)1/4
E)3/4

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as the change in output divided by the change in investment, which is $280 billion / $70 billion = 4. The formula for the multiplier is 1/(1-MPC), so 4 = 1/(1-MPC). Solving for MPC gives MPC = 3/4.

If an Increase in Planned Investment of $70 Billion Causes