If MPC is 0.75,what size effect would a $40 billion decrease in government purchases have on the "first round" of induced added consumption?
A)$30 billion
B)$40 billion
C)$120 billion
D)$160 billion

Question

Quizplus · Accepted Answer

According to the MPC formula, MPC = ∆C/∆Y, where ∆C represents the change in consumption and ∆Y represents the change in income. Using algebra, we can rearrange the formula to ∆C = MPC x ∆Y.
In this case, the change in income is equal to the initial change in government purchases, which is $40 billion. Therefore, ∆C = 0.75 x $40 billion = $30 billion. Thus, the correct answer is A.

If MPC Is 0