Question

Assume that an economy with the MPC of 0.9. There is a new investment of $2 billion. As a result of the new investment, income will be what?

a) $0.9 billion
b) $1.8 billion
c) $2.0 billion
d) $20.0 billion

Answer 1

When there is a new investment of $2 billion in an economy with an MPC of 0.9, the increase in income would be $1.8 billion.

Step-by-step explanation:

The question asks about the impact of a new investment on income in an economy with an MPC (marginal propensity to consume) of 0.9. The MPC represents the portion of each additional dollar of income that is spent. In this case, since the MPC is 0.9, it means that for every additional dollar earned, 90% of it will be spent.

When there is a new investment of $2 billion, it increases income by the same amount. The increase in income is calculated by multiplying the amount of the investment by the MPC. So, in this case, the increase in income would be $2 billion multiplied by 0.9, which equals $1.8 billion.

Therefore, the correct answer is $1.8 billion (option b) as the increase in income due to the new investment.