ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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$5B
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$10B
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$15B
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$20B
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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.
Detailed explanation-2: -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-3: -How Do You Calculate Marginal Propensity to Consume? To calculate the marginal propensity to consume, the change in consumption is divided by the change in income. For instance, if a person’s spending increases 90% more for each new dollar of earnings, it would be expressed as 0.9/1 = 0.9.
Detailed explanation-4: -If the MPC is 0.9 and investment spending increases by $20 billion, real GDP will increase by $200 billion.