Suppose autonomous consumption rises by $0.8 trillion and the marginal propensity to consume equals three-quarters.By what amount will the equilibrium level of output demanded rise?
A) by $0.2 trillion
B) by $0.6 trillion
C) by $1.07 trillion
D) by $3.2 trillion

Question

Suppose autonomous consumption rises by $0.8 trillion and the marginal propensity to consume equals three-quarters.By what amount will the equilibrium level of output demanded rise?  
A) by $0.2 trillion 
B) by $0.6 trillion 
C) by $1.07 trillion 
D) by $3.2 trillion

Quizplus · Accepted Answer

The equilibrium level of output demanded will rise by $3.2 trillion because the multiplier effect is calculated as 1/(1 - marginal propensity to consume), which in this case is 1/(1 - 0.75) = 4. Therefore, an increase in autonomous consumption of $0.8 trillion leads to an increase in the equilibrium level of output demanded by 0.8 trillion * 4 = $3.2 trillion.

Suppose Autonomous Consumption Rises by $0