Question

Consider a closed economy with constant interest rates. if the marginal propensity to consume is 0.75, then a $100 billion dollar increase in planned aggregate expenditure will raise aggregate income by ____ in the short run.

group of answer choices
a. $75 billion
b. $100 billion
c. $133 billion
d. $400 billion

Answer 1

A $100 billion increase in planned aggregate expenditure will raise aggregate income by $400 billion in the short run.

Step-by-step explanation:

The marginal propensity to consume (MPC) is the fraction of additional income that households spend on consumption. In this case, if the MPC is 0.75, it means that for every additional dollar of income, households will spend $0.75.

To calculate the increase in aggregate income, we can use the multiplier formula. The multiplier is 1/MPS (marginal propensity to save). Since the MPS is equal to 1 - MPC, the multiplier in this case would be 1/(1 - 0.75) = 1/0.25 = 4.

Therefore, a $100 billion increase in planned aggregate expenditure will raise the aggregate income by $100 billion x 4 = $400 billion in the short run.