If a $100 billion decrease in investment spending causes income to decline by $100 billion in the first round of the multiplier process and by $75 billion in the second round, income will eventually decline by
A)$200 billion.
B)$300 billion.
C)$400 billion.
D)$500 billion.

Question

Quizplus · Accepted Answer

The multiplier effect shows that the initial change in spending leads to a larger overall change in income. The first round decreases income by $100 billion, and the second round by $75 billion, indicating a marginal propensity to consume (MPC) of 0.75. The total decline in income is calculated as the initial change in spending divided by (1 - MPC), which is $100 billion / (1 - 0.75) = $400 billion.

If a $100 Billion Decrease in Investment Spending Causes Income