Consider the simplest macro model in which aggregate output is demand-determined.If autonomous consumption increases by $2 billion causing equilibrium national income to rise by $6 billion,the marginal propensity to spend must be
A)1.0.
B)0.5.
C)0.2.
D)0.67.
E)3.0.

Question

Quizplus · Accepted Answer

The simplest macro model in which aggregate output is demand-determined is the Keynesian model. In this model, the equilibrium level of output is determined by aggregate demand, which is the sum of consumption, investment, government spending, and net exports.

The increase in autonomous consumption of $2 billion leads to an increase in equilibrium national income of $6 billion. The marginal propensity to spend (MPS) is the fraction of each additional dollar of income that is spent. In other words, MPS measures the sensitivity of consumption to changes in income.

We can use the following formula to calculate MPS:

MPS = Change in consumption / Change in income

In this case, we know that the change in consumption is $2 billion and the change in income is $6 billion. Therefore:

MPS = 2 / 6 = 0.67

So the answer is D) 0.67.

Consider the Simplest Macro Model in Which Aggregate Output Is