Scenario 16-2. The following facts apply to a small, imaginary economy.
• Consumption spending is $5,200 when income is $8,000.
• Consumption spending is $5,536 when income is $8,400.
-Refer to Scenario 16-2. For this economy, an initial increase of $500 in government purchases translates into a

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) can be calculated as the change in consumption divided by the change in income. In this case, the MPC is ($5,536 - $5,200) / ($8,400 - $8,000) = 0.092. Given an initial increase in government purchases of $500, the total increase in aggregate demand would be $500 * (1 / (1 - MPC)) = $3,125.00 in the absence of the crowding-out effect.