g If the MPC is 3/5 then the multiplier is a. 4, so a $100 increase in government spending increases aggregate demand by $400. b. 1.5, so a $100 increase in government spending increases output by $150. c. 2.5, so a $100 increase in government spending increases aggregate demand by $250. d. 1.67, so a $100 increase in government spending increases output by $166.67.

Question

Melissa Cook

Business

26 April, 01:39

g If the MPC is 3/5 then the multiplier is a. 4, so a $100 increase in government spending increases aggregate demand by $400. b. 1.5, so a $100 increase in government spending increases output by $150. c. 2.5, so a $100 increase in government spending increases aggregate demand by $250. d. 1.67, so a $100 increase in government spending increases output by $166.67.

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Answers (1)

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Karter Cohen · Answer 1

Option (c) is correct.

Explanation:

Marginal propensity to consume (MPC) = 3/5

= 0.6

Therefore,

Multiplier = 1 : (1 - MPC)

= 1 : (1 - 0.6)

= 1 : 0.4

= 2.5

Hence, if there is an increase in the government spending by $100, then,

Aggregate demand increases by:

= Change in Government spending * Multiplier

= $100 * 2.5

= $250