ECONOMICS
AGGREGATE DEMAND
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]


increase by $10 billion


increase by 2.1 billion


decrease by $4.29 billion


increase by $4.29 billion

Detailed explanation1: If the MPC is . 70 and investment increases by $3 billion, the equilibrium GDP will: increase by $10 billion.
Detailed explanation2: 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 explanation3: 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 explanation4: To calculate the maximum change in GDP, use the spending multiplier. The formula for the spending multiplier is 1/MPS or 1/(1MPC). In the example above, the multiplier would be 5 (1/. 2).