Question

In a simple economy in which prices are constant and with no income taxes or imports, the marginal propensity to consume is 0.8. If investment increases by $50, what impact will that have on aggregate expenditure?
A) decrease by $100B) increase by $250C) increase by $100D) decrease by $250

Answer 1

Answer: Increase by $250

Explanation: As per the general rule of economics when there is an increase in income, that increase will eventually lead to increase in expenditure.

As, there is an increase in investment in the given case so it will result in increase in income for the economy.

We can compute it  as :-

$change\:in\:income=\frac{change\:in\:investment}{1-MPC}$

$change\:in\:income=\frac{\ 50}{1-0.8}$

                                        = $250

Therefore, the expenditure would increase by $250