?) 10 boil pel yeal. D) 10 ??????. ?? . 7. With an MPC of 0.85 and an MPI of 0.1

Question

?) 10 boil pel yeal. D) 10 ??????. ?? . 7. With an MPC of 0.85 and an MPI of 0.10 an increase of $1 billion in autonomous consumption would cause: A) An initial increase of $750 million in spending, B) $1 billion in multiplier effects. C) A total of $3 billion in changed autonomous consumption plus multiplier effects. D) A total change in spending of $4 billion. 8. Suppose an economy is at full-employment equilibrium at a GDP of $25 billion and investment declines by $4 billion. According to Keynes, this economy will: A) Quickly self adjust back to full employment B) Reach a new equilibrium at $21 billion. C) Eventually reach a new equilibrium at an output level significantly less than $21 billion. D) Reach a new equilibrium at a level of output between $21 billion and $25 billion.

Explanation / Answer

Question 7

MPC = 0.85

MPI = 0.10

Calculate the value of multiplier -

Multiplier = 1/[1- (MPC - MPI)] = 1/[1 - (0.85 - 0.10)] = 1/0.25 = 4

Calculate the total increase in spending -

Total increase = Initial increase in autonomous consumption * Multiplier = $1 billion * 4 = $4 billion

Thus, there would be a total change in spending of $4 billion.

Hence, the correct answer is the option (D).

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