Identical except for their marginal propensity to consume

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Reference no: EM131098354

Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is in equilibrium with real GDP and aggregate expenditure equal to $100 billion. The first economy's MPC is 0.5. Therefore, its initial aggregate expenditure line has a slope of 0.5 and psses through the point (100,100). The second economy's MPC is 0.75. Therefore, its initial aggregate expenditure lines has a slope of 0.75 and passes through the point (100,100). Now suppose there is an increase of $20 billion in investment in each economy. In the first economy (with MPC = 0.5), the $20 billion increase in investment causes aggregate output demanded to increase by_________. In the second economy (with MPC = 0.75), the $20 billion increase in investment causes aggregate output demanded to increase by _____________. Therefore, a higher MPC is associated with a ________multiplier.

Reference no: EM131098354

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