Suppose that the marginal propensity to consume is 0.95, and investment spending

ID: 1228235 • Letter: S

Question

Suppose that the marginal propensity to consume is 0.95, and investment spending increases by $100 billion. The increase in aggregate demand is:

$80 billion, composed of $100 billion in investment spending and a decrease in consumption of $20 billion.

$1,000 billion, composed of $100 billion in investment spending and $975 billion in consumption.

$2,000 billion, composed of $100 billion in investment spending and $1,900 billion in consumption.

$100 billion, the amount of investment spending.

$80 billion, composed of $100 billion in investment spending and a decrease in consumption of $20 billion.

$1,000 billion, composed of $100 billion in investment spending and $975 billion in consumption.

$2,000 billion, composed of $100 billion in investment spending and $1,900 billion in consumption.

$100 billion, the amount of investment spending.

dY /dI = 1 / 1-mpc => 1 / 1-0.95 => 20

dY = 20 x 100 => 2000

dC/dY = MPC

dC = 0.95 x 2000 => 1900

C. $2,000 billion, composed of $100 billion in investment spending and $1,900 billion in consumption.

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