Suppose that the level of GDP increased by $400 billion in a private closed economy where the marginal propensity to consume is 0.60. Aggregate expenditures must have increased byGroup of answer choices$160 billion.$400 billion.$80 billion.$240 billion.
Question
Suppose that the level of GDP increased by 160 billion.80 billion.$240 billion.
Solution
In this scenario, the increase in GDP is due to an increase in aggregate expenditures. The marginal propensity to consume (MPC) is the increase in consumer spending due to an increase in income. In this case, the MPC is 0.60, which means that for every additional dollar of income, consumers will spend 60 cents and save 40 cents.
Here's how you calculate the increase in aggregate expenditures:
- First, identify the increase in GDP, which is $400 billion.
- Then, multiply this increase by the MPC. So, 240 billion.
Therefore, aggregate expenditures must have increased by $240 billion.
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