If an economy consumes 75% of any increase in income, then an increase in autonomous investment...
If an economy consumes 75% of any increase in income, then an increase in autonomous investment of $1 billion could result in an increase in RGDP of as much as:
a. $4.0 billion
b. $5.0 billion
c. $1.8 billion
d. $6.0 billion
e. $1.0 billion
Please show all work and as simple as possible!
Homework Answers
Answer
option a
-----
A 75% consumption of disposable income means a person consumes $0.75 from $1 income.
It means the marginal propensity to consume(MPC) is 0.75.
Formula for the multiplier is:
Multiplier =1/(1-MPC)
=1/(1-0.75)
=4
the maximum change in GDP=change in autonomous investment * multiplier
=1*4
=$4 billion
increase RGDP of as much as $4 billion
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