Question

During a pandemic, an economy goes into a recession due to a decrease in aggregate demand. Assume the government creates a program to help stabilize the economy by increasing expenditures by $700 billion. How much spending would occur during the third round of spending if the marginal propensity to consume (MPC) was 0.6 in the economy

Answer 1

The spending that would occur during the third round of spending if the marginal propensity to consume (MPC) was 0.6 will be $420 billion.

• Increase in expenditure = $700 billion.

• Marginal propensity to consume = 0.6

The amount of spending based on the information given will be:

= 0.6 × $700 billion

= $420 billion.

Therefore, the correct option is $420 billion.

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