If the marginal propensity to consume is 0

Economics Oct 28, 2020

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

Expert Solution

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

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