Question

If the marginal propensity to consume is 0.8, full-employment output is $14 trillion, and current output is $13.5 trillion, then investment spending must _____ to reach fullemployment output. A) increase by $0.5 trillion B) decrease by $0.5 trillion C) increase by $0.1 trillionD) increase by $0.4 trillion

Answer 1

c. Increase by $0.1 trillion

Step-by-step explanation:

Investment spending Multiplier is a concept in economics that measure how a given change in investment increases output. So if current output of $13.5 trillion must increase to $14 trillion, we employ the multiplier formula to derive what amount of investment spending is needed to get $o.5trillion increase in output.

(change in output)/ (change in investment) = 1/(1-mpc)

Note that mpc means marginal propensity to consume.

Let change in investment = X

change in output = 14 - 13.5 = $0.5trillion

mpc = 0.8

(0.5)/X = 1(1-0,8)

0.5/X = 1/0.2

cross multiply

X = 0.1

Thus the needed change in investment is an increase of $0.1 trillion. In other words, if investment increases by $0.1 trillion, current output will increase from $13.5 trillion to $14 trillion.