If an increase in autonomous consumption spending of $15 million results in a $60 million increase in equilibrium real GDP, then the MPC is:
A)0.5.
B)0.9.
C)0.8.
D)0.75.

Question

Quizplus · Accepted Answer

The multiplier formula is:

Multiplier = 1 / (1 - MPC)

Where MPC is the marginal propensity to consume.

Using the information provided, we can calculate the multiplier as follows:

Multiplier = ($60 million increase in GDP) / ($15 million increase in autonomous spending)

Multiplier = 4

Therefore,

4 = 1 / (1 - MPC)

1 - MPC = 1 / 4

MPC = 1 - 1/4

MPC = 0.75

Therefore, the correct answer is D.

If an Increase in Autonomous Consumption Spending of $15 Million