Question

If the marginal propensity to consume is 0.5​, then the multiplier is 2 and the ​$25 billion increase in government spending would increase aggregate demand by a total of ​$50 billion. ​(Enter your responses rounded to one decimal​ place.)

Answer 1

Answer:

This is correct.

Explanation:

The multiplier is what determines that how much of an injection actually impacts the economy. This means that an injection by the Government in the economy $1 usually has an increased net effect by the value of the multiplier.

Multiplier is calculated as

Multiplier = 1 / 1-Mpc, where Mpc = marginal propensity to consume

So we verify the multiplier,

Multiplier = 1 / 1 - 0.5 = 2

thus the injection of $50 Billion is brought by an initial government injection of 50/2 = $25 billion.

This thus confirms the statements.

Hope that helps.