Suppose the MPC is 0.8 in Canada and the MPC_his 0.55. If income increases by $100 million in Canada, then the increase in consumption of foreign goods will be: A) $35 million. B) $25 million. C) $80 million. D) $100 million.

Question

Quizplus · Accepted Answer

MPC (marginal propensity to consume) in Canada is 0.8, meaning that for every $1 increase in income, Canadian consumers will spend $0.8. MPC_h is the marginal propensity to consume foreign goods, meaning for every $1 increase in income, consumers will spend $0.55 on foreign goods. Therefore, if income increases by $100 million in Canada: - Canadian consumers will spend $0.8 * $100 million = $80 million on domestic goods - Canadian consumers will spend $0.2 * $100 million = $20 million on foreign goods - The increase in consumption of foreign goods will be $20 million * 0.55 = $11 million - Converted to CAD: $11 million / 1.33 (let's assume CAD/USD exchange rate of 1.33) = $8.27 million Therefore, the increase in consumption of foreign goods is $8.27 million which is closest to answer B, $25 million.

Suppose the MPC Is 0