MPC Question.... i got no idea!! Help Plzzzz!!!! (1 Viewer)

[screwed8899]

"Other things being equal, what will be the resulting increase in income for an economy that has a marginal propensity to consume of 0.6, if investment increases by $10 million?"

a) $6 million
b) $10 million
c) $25 million
d) $60 million

The answer is c) $25 million...but i have no idea on how they got it!

Help plzzzzz!!!!!!!!!!!

 

[launcher169]

ok the answer to this question is 25 million

because of the multiplier....

1/1-MPC

so when there is an increase in investment of 10 million, the overall effect in the economy is 1/1-0.6 => 2.5*10 million = 25 million

 

[screwed8899]

Thanx alot