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)increase by $40 billion; 0.75
B)decrease by $10 billion; 0.25
C)increase by $10 billion; 4.0
D)increase by $40 billion; 0.25
E)decrease by $40 billion; 0.75

Question

Quizplus · Accepted Answer

Since the simple multiplier is 4, an increase in planned investment spending of $10 billion will cause aggregate output to increase by 4 times that amount, or $40 billion. The marginal propensity to spend is the fraction of any additional income that is spent, so it must equal 0.75 (which is the difference between 1 and the marginal propensity to save, assumed to be 0.25 in this question).

Suppose Aggregate Output Is Demand- Determined