Question

Assume there is an increase in Government spending of $10 and the aggregate MPC is 0.8. Of the $8 of income that is received in the second round, only _______ will be spent on Consumption.

Answer 1

$50

Step-by-step explanation:

For computing the amount which is spent on consumption, first we have to determine the multiplier spending which is shown below:

Multiplier spending = (1) ÷ (1 - MPC)

= (1) ÷ ( 1 - 0.8)

= 1 ÷ 0.2

= 5

And, the government spending is $10

So, the consumption amount spent would be

= 5 ×$10

= $50