ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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0.75
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4
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5
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7.5
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none of the above
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Detailed explanation-1: -If the MPC is 0.75, the Keynesian government spending multiplier will be 4/3; that is, an increase of $ 300 billion in government spending will lead to an increase in GDP of $ 400 billion. The multiplier is 1 / (1-MPC) = 1 / MPS = 1 /0.25 = 4.
Detailed explanation-2: -If the marginal propensity to consume is 0.75, the value of the spending multiplier will be 5.
Detailed explanation-3: -Therefore, if K= 4, MPC= 3/4 or 0.75.
Detailed explanation-4: -If out of it, he spends 70 paise on consumption (i.e., MPC = 0.7) and saves 30 paise (i.e., MPS = 0 3) then MPC + MPS = 0.7 + 0.3 = 1.
Detailed explanation-5: -Use the MPC formula Using the above example, you can divide $3, 500 by $5, 000, which equals 0.7. This means that the consumer in the example spent 70% of every new dollar of disposable income they earned.