ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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With an MPS of 0.2, an increase in government spending of $240 m will result in the equilibrium level of income rising by
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$1200m
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$480m
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$960m
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$2400m
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Explanation:
Detailed explanation-1: -If the marginal propensity to save is 0.2 in an economy, a $30 billion rise in investment spending will increase consumption by 120.
Detailed explanation-2: -If the marginal propensity to consume (MPC) is 0.90, the value of the spending multiplier is 90.
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 MPC increases, the value of multiplier will increase.
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