Question

Calculate the change in output (income) for each scenario. Show all work. a. Suppose foreign investors decide to increase investment within the United States by $450M and the MPC = 0.9. What is the total change in output (income)? b. The City Planner of Sacramento has decided to invest $450M in downtown. If the MPC = 0.75, what is the total economic impact on the local economy? c. Suppose the Federal government has decided to increase infrastructure spending in the Midwest by $450M. If the MPC = 0.5, what is the total change in output (income) in the Midwest? d. How does the size of the MPC impact the multiplier?

Answer 1

MPC (Marginal propensity to consume) and multiplier have the following relation :-

a)When investment = 450 million dollars and MPC = 0.9, change in output will be 4500 million dollars (given below)

b)When investment = 450 million dollars and MPC = 0.75, change in output will be 1800 million dollars (given below)

c)When investment = 450 million dollars and MPC = 0.5, change in output will be 900 million dollars (given below)

d) From the formula we know that higher MPC means the value of multiplier is higher and vice versa

i.e. Value of MPC is directly proportional to the multiplier