Question

The income expenditure model predicts that if the marginal propensity to consume is 0.75 and the federal government increases spending by $100 billion, real GDP will increase by:_______

a) $100 billion.
b) $750 billion.
c) $400 billion.
d) $300 billion.

Answer 1

Option c ($400 billion) is the correct answer.

Step-by-step explanation:

According to the question,

Government expenditure,

G = 100

Marginal propensity to consume,

c = 0.75

Now,

The autonomous spending multiplier will be:

⇒
`\Delta Y = (1)/(1-c)* \Delta G`

By substituting the values, we get

`=(1)/(1-0.75)* 100`

`=4* 100`

`=400`