Suppose aggregate output is demand- determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The marginal propensity to spend is equal to
A)0.4.
B)- 0.6.
C)- 2.5.
D)2.5.
E)0.6.

Question

Quizplus · Accepted Answer

The marginal propensity to spend (MPS) can be calculated using the multiplier effect formula: Multiplier = 1/(1-MPS). Given that a $20 million decrease in investment leads to a $50 million decrease in income, the multiplier is 50/20 = 2.5. Solving 2.5 = 1/(1-MPS) gives MPS = 0.6.

Suppose Aggregate Output Is Demand- Determined