Consider the simplest macro model with demand-determined output.Suppose an increase in business confidence leads firms to increase investment in new equipment by $100 million.The marginal propensity to spend in this economy is 0.75.What is the increase in expenditure in this economy during the second round of spending?
A)$25 million
B)$100 million
C)$400 million
D)$75 million
E)$500 million

Question

Quizplus · Accepted Answer

The increase in investment in new equipment by $100 million will lead to an increase in expenditure by $100 million x 0.75 = $75 million in the first round. In the second round, this increase in expenditure will lead to an increase in income and output by $75 million x 0.75 = $56.25 million. Therefore, the total increase in expenditure in the second round is $56.25 million.

Consider the Simplest Macro Model with Demand-Determined Output