Question

Suppose disposable income is $1,000 when the average propensity to consume is 0.75. Then

Group of answer choices

the marginal propensity to consume must be 0.75.

the slope of the consumption schedule must be 0.25

the level of saving is $250.

the average propensity to save must be 0.2

If the MPC is .70 and investment increases by $6 billion, the equilibrium GDP will:

Group of answer choices

increase by $10 billion.

increase by $20 billion.

increase by $42 billion.

increase by $18 billion.

Answer 1

1. Disposable Income = $1,000

The average propensity to consume (C/Y) = 0.75

Putting the values:

C/1,000 = 0.75

C = 750

So, consumption expenditure is $750.

The income is either used for consumption or for saving. So, the savings are $1,000 - $750 = $250. Therefore, the correct answer is 'Option C'.

2. MPC = 0.7

Increase in investment = $6 billion

Tbe GDP will increase by multiplier times the change in investment. The multiplier is calculated by the following formula:

Multiplier = 1/(1-MPC) = 1/1-0.7 = 1/0.3 = 3.33

The change in equilibrium GDP is:

So, the equilibrium GDP rises by $20 billion. Therefore, the correct answer is 'Option B'.