Chapter 4R, Problem 22MCQ

To determine

To determine the change in GDP due to change in spending given marginal propensity to consume.

Explanation of Solution

The change in output due to change in spending is calculated as follows:

  $\begin{array}{c}dE=\$1000\\ c=0.75\end{array}$

Hence,

  $\begin{array}{c}dY=\frac{\$1000}{\left(1-0.75\right)}\\ =\frac{\$1000}{0.25}\\ =\$4000\end{array}$

Thus, option ‘d’ is the correct option.

Mathematically, the rest of the options are incorrect.

Economics Concept Introduction

The change in output due to a change in spending can be calculated using the following formula.

  $\begin{array}{l}\frac{dY}{dE}=\frac{1}{\left(1-c\right)}\\ dY=\frac{dE}{\left(1-c\right)}\end{array}$

here, $dE$ is the change in spending.

  $dY$ is the change in output or GDP.

  $c$ is the marginal propensity to consume.