If consumption decreases from $600 billion to $575 billion and the marginal propensity to consume is 0.8, then equilibrium income will:
A) fall by $25 billion.
B) fall by $125 billion.
C) rise by $25 billion.
D) rise by $125 billion.

Question

Quizplus · Accepted Answer

The change in equilibrium income is calculated using the multiplier effect. The multiplier is 1/(1-MPC), which is 1/(1-0.8) = 5. The decrease in consumption is $25 billion, so the equilibrium income will fall by $25 billion * 5 = $125 billion.

If Consumption Decreases from $600 Billion to $575 Billion and the Marginal