Suppose that the marginal propensity to consume in Frugalia is 0.60. The government of Frugalia enacts a stimulus program that increases spending by $10 million. By how much will aggregate expenditures increase in Frugalia?
a) $4 million
b) $10 million
c) $25 million
d) $40 million

Question

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valetta valetta · Answer 1 · 2019-11-18T09:09:07+01:00

Answer:

option (c) $25 million

Explanation:

Data provided in the question:

The marginal propensity to consume in Frugalia, MPC = 0.60

Increase in spending = $10 million

Now,

The total increase in income

= [tex]\frac{\textup{1}}{\textup{1-MPC}}[/tex] × Increase in spending

on substituting the respective values, we get

= [tex]\frac{\textup{1}}{\textup{1-0.6}}[/tex] × $10 million

= [tex]\frac{\textup{1}}{\textup{0.4}}[/tex] × $10 million

or

= 2.5 × $10 million

or

= $25 million

Hence,

The answer is option (c) $25 million