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 $12 billion,the marginal propensity to spend must be
A)1/3.
B)1/2.
C)2/3.
D)4/5.
E)3.

Question

Quizplus · Accepted Answer

The marginal propensity to spend (MPS) is the fraction of additional income that is spent. We can use the formula for the expenditure multiplier to solve the problem: 
expenditure multiplier = 1 / (1 - MPS)
We know that equilibrium national income falls by $12 billion when planned investment expenditures decrease by $4 billion: 
expenditure multiplier = change in equilibrium national income / change in investment 
plugging in the numbers: 
1 / (1 - MPS) = -12 / -4 = 3 
Solving for MPS: 
1 - MPS = 1 / 3 
MPS = 2 / 3 
Therefore, the answer is C: 2/3.

Suppose Aggregate Output Is Demand-Determined