Question

If an initial increase in government spending of $100 billion leads to a total increase of $400 billion in income, the marginal propensity to consume in the economy is

Answer 1

0.75

Step-by-step explanation:

Government spending of $100 billion

Total increase of $400 billion in income

Multiplier = 1 / (`1 - MPC)

400 billion/100 billion = 1 / (`1 - MPC)

1 / (`1 - MPC) = 4

1 - MPC = 1/4

1 - MPC = 0.25

MPC = 1 - 0.25

MPC = 0.75

Thus, the marginal propensity to consume in the economy is 0.75.