Consider a simple macro model with a constant price level and demand-determined output.If the simple multiplier is 3 and there is a $2 billion increase in autonomous investment spending,then the equilibrium level of income will increase by
A)$1.2 billion.
B)$2 billion
C)$3 billion.
D)$4.5 billion.
E)$6 billion.

Question

Quizplus · Accepted Answer

The simple multiplier formula is 1/(1-MPC), where MPC is the marginal propensity to consume. Given the multiplier is 3, this means that for every $1 increase in autonomous spending, the equilibrium level of income increases by $3. Therefore, a $2 billion increase in autonomous investment spending leads to a $6 billion increase in the equilibrium level of income.

Consider a Simple Macro Model with a Constant Price Level