Question

Suppose there are no imports, taxes or other leakages in the economy. If the Marginal Propensity...

Suppose there are no imports, taxes or other leakages in the economy. If the Marginal Propensity to Consume is .80 and the government increases spending by $40 billion, by how much would output increase in the economy?

Select one:

a. $40 billion

b. $48 billion

c. $80 billion

d. $120 billion

e. $200 billion.

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Answer #1

Marginal propensity to consume, MPC = 0.80

Government increases spending by $ 40 billion

MPS-1-MPC

MPS 1-08

large MPS = {0.2}

Multiplier = 1/MPS = 1/0.2 = 5

Here, the government has increased the spending thus there will be increase in the economy

Increase = Multiplier * Spending = 5*40 = $ 200 billion.

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