QQuestionEconomics
QuestionEconomics
"If the MPC (Marginal Propensity to Consume) is 0.8, what change in investment spending is required to effect a total change in income of 60 billion?
A. 12 billion
B. 15 billion
C. 20 billion
D. 25 billion"
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Answer
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Step 1:I'll solve this macroeconomics problem step by step using the specified LaTeX formatting guidelines:
Step 2:: Understand the Key Economic Concept
In this problem, the MPC is $$0.8$$, meaning for every additional dollar of income, 80 cents are consumed.
The Marginal Propensity to Consume (MPC) represents the proportion of additional income that is spent rather than saved.
Step 3:: Recall the Investment Multiplier Formula
\text{Multiplier} = \frac{1}{1 - 0.8} = \frac{1}{0.2} = 5
With an MPC of 0.8, the multiplier will be:
Step 4:: Calculate the Required Change in Investment
\text{Change in Investment} = \frac{60 \text{ billion}}{5} = 12 \text{ billion}
Using the multiplier formula:
Final Answer
Key Insights: - The multiplier amplifies the initial change in investment - Higher MPC leads to a larger multiplier effect - This demonstrates how changes in investment can impact total income
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