Suppose aggregate output is demand-determined.If the business community decreases its planned investment expenditures by $4 billion,causing equilibrium national income to fall by $20 billion,the marginal propensity to spend must be
A)2/5.
B)1/3.
C)1/2.
D)4/5.
E)5.

Question

Quizplus · Accepted Answer

The marginal propensity to spend (MPS) is calculated using the multiplier effect formula: Multiplier = 1 / (1 - MPS). Given that a $4 billion decrease in investment causes a $20 billion decrease in national income, the multiplier is 5 ($20 billion / $4 billion). Solving the multiplier formula for MPS gives MPS = 1 - (1/Multiplier), which is 1 - (1/5) = 4/5.

Suppose Aggregate Output Is Demand-Determined