Consider a simple macro model with demand- determined output. Using such a model, if economists want to estimate the effect of a given change in desired investment on equilibrium national income, they would multiply the change in desired investment by the reciprocal of one minus
A)the marginal propensity not to spend.
B)the marginal propensity to spend.
C)the marginal propensity to save.
D)the average propensity to save.
E)the equilibrium level of national income.

Question

Quizplus · Accepted Answer

The correct formula for calculating the effect of a change in desired investment on equilibrium national income (Y) is ΔY = ΔI/(1 - MPC), where MPC is the marginal propensity to consume. This formula assumes that output is demand-determined, meaning that changes in autonomous spending (such as investment) directly affect equilibrium output. The reciprocal of one minus the MPC is therefore the multiplier, which indicates the amount by which equilibrium output will change in response to a change in autonomous spending. Choice B is the option that includes the correct variable (the marginal propensity to spend) in the formula.

Consider a Simple Macro Model with Demand- Determined Output