Question

If autonomous consumption increases by $50 billion and the MPC is 0.95, the resulting change in total spending equals__________________ billion, assuming that idle resources exist at each expenditure round and the multiplier is operative.

Answer 1

Answer: $1,000 billion

Explanation:

The change in total spending is calculated by:

= Autonomous consumption increase * Multiplier

Multiplier:

= 1 / (1 - MPC)

= 1 / (1 - 0.95)

= 1 / 0.05

= 20

Change in total spending:

= 50 billion * 20

= $1,000 billion