Suppose aggregate output is demand-determined.Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million.The marginal propensity to spend is equal to
A)-0.6.
B)0.4.
C)0.6.
D)2.5.
E)-2.5.

Question

Quizplus · Accepted Answer

The marginal propensity to spend (MPS) is the fraction of a change in income that is spent. We can use the multiplier formula to solve for the MPS:
Multiplier = 1 / (1 - MPS)
Given that a $20 million decrease in autonomous investment expenditure leads to a $50 million decrease in equilibrium national income, we can calculate the multiplier as follows:
Multiplier = ΔY / ΔI = -$50 million / -$20 million = 2.5
Now we can use the formula for the multiplier to solve for the MPS:
2.5 = 1 / (1 - MPS)
2.5(1 - MPS) = 1
2.5 - 2.5MPS = 1
MPS = 0.6
Therefore, the answer is C, with an MPS of 0.6.

Suppose Aggregate Output Is Demand-Determined