# ECONOMICS (CBSE/UGC NET)

## ECONOMICS

### AGGREGATE DEMAND

 Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
If the MPC is .7 and gross investment spending increase by \$3 billion, GDP will
 A increase by \$10 billion B increase by 2.1 billion C decrease by \$4.29 billion D increase by \$4.29 billion
Explanation:

Detailed explanation-1: -If the MPC is . 70 and investment increases by \$3 billion, the equilibrium GDP will: increase by \$10 billion.

Detailed explanation-2: -In an economy MPC is 0.75. If investment expenditure increases by 500 crores, calculate total increase in income and consumption expenditure. Total increase in income = Increase in investment x K = 500 x 4 = 2, 000 crores. Total increase in consumption expenditure = 0.75 of 2, 000 = 1, 500 crores.

Detailed explanation-3: -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.

Detailed explanation-4: -To calculate the maximum change in GDP, use the spending multiplier. The formula for the spending multiplier is 1/MPS or 1/(1-MPC). In the example above, the multiplier would be 5 (1/. 2).

There is 1 question to complete.