Suppose Lower Interest Rates Suddenly Lead to an Injection of $325

question 35

Multiple Choice

Suppose lower interest rates suddenly lead to an injection of $325 additional investment spending into the economy and the marginal propensity to consume is 0.80. Table 10.1
$\begin{array}{c}\begin{array}{|l|}\hline\\ \text {Spending Cycles}\\\hline \text {First-cycle}\\\text {spending}\\\hline \text {Second-cycle}\\\text {spending}\\\hline \text {Third-cycle}\\\text {spending}\\\hline \end{array}\begin{array}{c|}\hline \text {Change in this Cycle's Spending}\\\text { and Income}\\\hline\\\quad\quad\quad\quad\quad\quad\quad\quad \$ 325 \\\hline\\\\\hline\\\\\hline\end{array}\begin{array}{c|}\hline \text {Cumulative Increase in Spending}\\ \text {and Income}\\\hline\\\quad\quad\quad\quad\quad\quad\quad\quad \$325\\\hline\\\\\hline\\\\\hline\end{array}\end{array}$
In Table 10.1,what will be the total increase in aggregate demand resulting from the initial $325 increase in investment expenditure after an infinite number of cycles?

• A)$1,040.
• B)$1,625.
• C)$3,965.
• D)$325.

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Definitions:

Equivalent Cost

The cost associated with producing an additional unit of output when costs are shared among products or services.