Consider the simplest macro model with demand-determined output.Suppose an increase in business confidence leads firms to increase investment in new equipment by $3.5 billion.The marginal propensity to spend in this economy is 0.6.What is the eventual total new expenditure in this economy due to the increase in investment?
A)$2.1 billion.
B)$5.8 billion.
C)$3.5 billion.
D)$7.0 billion.
E)$8.75 billion.

Question

Quizplus · Accepted Answer

The eventual total new expenditure in the economy due to the increase in investment can be calculated using the multiplier effect formula: Multiplier = 1 / (1 - marginal propensity to spend). In this case, the multiplier is 1 / (1 - 0.6) = 2.5. Therefore, the total new expenditure is the initial investment increase ($3.5 billion) multiplied by the multiplier (2.5), which equals $8.75 billion.

Consider the Simplest Macro Model with Demand-Determined Output