Question

If the marginal propensity to consume is 0.9, what is the maximum amount that the equilibrium gross domestic product could change if government expenditures increase by $1 billion?

Answer 1

Answer: There is change of $0.9 billion in government expenditures.

Step-by-step explanation:

Since we know that

Marginal propensity to consume tells that the rate at which there is change in consumption due to change in income.

According to our situation, MPC is the change in amount of gross domestic product due to change in government expenditure.

So, it becomes,

$MPC=\dfrac{\text{Change in gross domestic product}}{\text{Change in government expenditure}}\\\\0.9=\dfrac{x}{1}\\\\x=0.9$

Hence, there is change of $0.9 billion in government expenditures.