If the marginal propensity to consume is 0.6 and investment spending declines by $50 billion,by how much will equilibrium output change?
A) -$125 billion
B) -$83.3 billion
C) -$50 billion
D) $83.3 billion
E) $125 billion

Question

Quizplus · Accepted Answer

The multiplier is 1/(1-MPC) = 1/(1-0.6) = 2.5. So, a $50 billion decline in investment spending will lead to a $50 billion * 2.5 = $125 billion decline in equilibrium output.

If the Marginal Propensity to Consume Is 0