Question

In a certain economy, when income is $500, consumer spending is $350. The value of the multiplier for this economy is 3.33. It follows that, when income is $1000, consumer spending is

Answer 1

Answer: $700

Step-by-step explanation:

The multiplier can used to calculate the Marginal propensity to consume.

Multiplier = 1 / Marginal propensity to save

3.33 = 1 / MPS

MPS = 1/3.33

= 30%

Marginal propensity to save + Marginal propensity to consume = 1

30% + MPC = 1

MPC = 70%

This means that for every $1 increase in income, 70% is spent on consumption.

If income is $1,000, consumption is;

= 70% * 1,000

= $700