Consider a model in which output is demand-determined. If the marginal propensity to spend out of national income is 0.4, then a $0.6 billion decrease in government purchases will cause equilibrium national income to
By approximately .
A) decrease; $1.50 billion
B) decrease; $1.00 billion
C) decrease; $0.24 billion
D) increase; $1.00 billion
E) increase; $1.50 billion

Question

Quizplus · Accepted Answer

With a marginal propensity to spend of 0.4, a $0.6 billion decrease in government purchases will lead to a decrease in equilibrium national income equal to (0.4/$0.6 billion) x (-$0.6 billion) = -$0.4 billion or $0.4 billion decrease. Thus, the equilibrium national income will decrease by $1.00 billion ($0.4 billion x 2.5 multiplier).

Consider a Model in Which Output Is Demand-Determined