Suppose aggregate output is demand-determined.If the simple multiplier is 4 and there is a $10 billion increase in planned investment spending,then equilibrium income will ________ and the marginal propensity to spend must equal ________.
A)decrease by $40 billion; 0.75
B)decrease by $10 billion; 0.25
C)increase by $40 billion; 0.25
D)increase by $40 billion; 0.75
E)increase by $10 billion; 4.0

Question

Quizplus · Accepted Answer

With a simple multiplier of 4, a $10 billion increase in planned investment spending will lead to a $40 billion increase in equilibrium income (4 x $10 billion). This means that equilibrium income will increase by $40 billion. The marginal propensity to spend must equal 0.75, as the simple multiplier is calculated as 1/(1-MPS), or 4=1/(1-MPS), solving for MPS gives MPS=0.75. Therefore, the correct answer is D.

Suppose Aggregate Output Is Demand-Determined