Question

Suppose economists observe that an increase in government spending of $15 billion raises the total demand for goods and services by $60 billion.
If these economists ignore the possibility of crowding out, they would estimate the marginal propensity to consume (MPC) to be

1/4

3/4

1/4

4

Now suppose the economists allow for crowding out.Their new estimate of the MPC would be larger or smaller than their initial one

Answer 1

Answer:

1/4

Explanation:

MPC = dC/dY

dC is the change in consumption

dY is the change in demand for goods and services.

MPC = 15/60 = 1/4

If allowance is made for crowding out, the new estimate will be larger.