Assume That the MPC Is 0

question 94

Multiple Choice

Assume that the MPC is 0.75. If government spending increases by $400, equilibrium output ________; and if taxes increase by $400, equilibrium output ________.

• A) increases by $1,600; decreases by $1,600
• B) increases by $1,600; decreases by $1,200
• C) increases by $1,200; decreases by $1,600
• D) increases by $400; decreases by $400

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Definitions:

Cash Inflows

Money or funds coming into a company, from operations, investments, or financing activities.

Useful Life

The estimated duration of time that an asset is expected to remain productive or useful for its intended purpose.

Labor Savings

The reduction in the amount of labor (and consequently, labor costs) necessary to perform a particular task or produce a certain amount of goods or services.

Internal Rate

Typically referring to the internal rate of return (IRR), which is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.