Suppose an increase in planned investment of $70 billion causes equilibrium output demanded to rise by $280 billion.What is the value of the marginal propensity to consume?
A) 1/4
B) 1/3
C) 3/4
D) 4/3

Question

Suppose an increase in planned investment of $70 billion causes equilibrium output demanded to rise by $280 billion.What is the value of the marginal propensity to consume?  
A) 1/4 
B) 1/3 
C) 3/4 
D) 4/3

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) can be calculated using the multiplier effect formula: Multiplier = 1 / (1 - MPC). Given that a $70 billion increase in investment leads to a $280 billion increase in output, the multiplier is 280 / 70 = 4. Solving the multiplier formula for MPC gives MPC = 3/4.

Suppose an Increase in Planned Investment of $70 Billion Causes