contestada

The income expenditure model predicts that if the marginal propensity to consume is 0.75 and the federal government increases spending by $100 billion, real GDP will increase by:_______
a) $100 billion.
b) $750 billion.
c) $400 billion.
d) $300 billion.

Respuesta :

Cricetus

Answer:

Option c ($400 billion) is the correct answer.

Explanation:

According to the question,

Government expenditure,

G = 100

Marginal propensity to consume,

c = 0.75

Now,

The autonomous spending multiplier will be:

⇒ [tex]\Delta Y = \frac{1}{1-c}\times \Delta G[/tex]

By substituting the values, we get

           [tex]=\frac{1}{1-0.75}\times 100[/tex]

           [tex]=4\times 100[/tex]

           [tex]=400[/tex]