Question

g Suppose that there are NO taxes or imports. If the marginal propensity to consume is 0.75, a(n) ____ in autonomous spending will result in a $20 billion increase in equilibrium Real GDP. A. $5 billon decrease B. $20 billon increase C. $80 billon decrease D. $5 billon increase E. $80 billon increase

Answer 1

$5 billion

Step-by-step explanation:

The marginal propensity to consume shows the ratio of how much increases in consumption when disposable income increases. Disposable income is the income after all cut(like tax). If the MPC is 0.75 mean that every 1$ of increase in income, someone will spend $0.75 and save $0.25. That $0.75 will be spent on someone and increase their income too. So, an increase in autonomous spending will cause an increase in income. This positive feedback will keep happening so that the actual increase is higher and called investment multiplier. The multiplier in this question is :

multiplier = 1/ (1-MPC)

multiplier= 1/0.25

multiplier= 4

Since the multiplier is 4, the increase from income that results as a $20 billion increase in GDP will be:

GDP increase = multiplier * autonomous spending increase

$20 billion = 4 * autonomous spending increase

autonomous spending increase= $20 billion / 4

autonomous spending increase= $5 billion