ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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$0.75 million
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$4 million
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$0.25 million
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$3 million
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$1.75 million
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Detailed explanation-1: -The total change in national income is the initial increase in government, or “autonomous, ” spending times the fiscal multiplier. Since the marginal propensity to consume is 0.75, the fiscal multiplier would be four.
Detailed explanation-2: -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-3: -Changes in investment will affect the investment multiplier but not the expenditure multiplier. Since the expenditure multiplier increases as MPC increases in cannot increase when MPC decreases.
Detailed explanation-4: -If the marginal propensity to consume is 0.8, the marginal propensity to save is 8. As interest rates rise, spending decreases. The marginal propensity to consume must always be larger than the marginal propensity to save. If the marginal propensity to consume is 0.5, the marginal propensity to save is 0.5.