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Homework answers / question archive / If the marginal propensity to consume is 0
If the marginal propensity to consume is 0.75 and investment spending increases by $200 billion, by how much will equilibrium output increase?
a. $350 billion
b. $150 billion
c. $200 billion
d. $266.7 billion
e. $800 billion
Answer - $800 billion
Explaination -
Increase in equilibrium output = [1 / ( 1 - marginal propensity to consume ) ] * change in investment spending
= [ 1 / ( 1 - 0.75 ) ] * $200 billion
= [ 1 / 0.25 ] * $200 billion
= 4 * $200 billion
= $800 billion
