Suppose consumers' disposable income increased by $341 billion and their spending increased by $299 billion. What...

Suppose consumers' disposable income increased by $341 billion and their spending increased by $299 billion. What was the MPC?

Suppose the government increases education spending by $30 billion. If the marginal propensity to consume is 0.90, how much will total spending increase?

Expert Solution

Solution:-

(a). Calculate MPC:-

MPC = Change in consumption / Change in Disposable income

= $299 / $341

= 0.88

(b). Calculate Total Spending:-

Government spending multiplier = 1 / (1 - MPC)

= 1 / (1 - 0.9)

= 1 / 0.1

= 10

Therefore, total spending would increase by = multiplier x education spending

= 10 x $30 billion

= $300 billion.

Rahul Sunny answered 7 months ago

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