If the Marginal Propensity to Consume Is 0

question 11

Multiple Choice

If the marginal propensity to consume is 0.75, a $40 billion decrease in government purchases, all other things constant, would:

• A)reduce consumption by $160 billion in the first round and overall aggregate demand by $640 billion.
• B)reduce consumption by $120 billion in the first round and overall aggregate demand by $480 billion.
• C)reduce consumption by $40 billion in the first round and overall aggregate demand by $160 billion.
• D)reduce consumption by $30 billion in the first round and overall aggregate demand by$160 billion.
• E)reduce consumption by $25 billion in the first round and overall aggregate demand by $640 billion.

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Definitions:

Net Operating Income

The profit generated from a company's everyday business operations, indicating how much revenue exceeds both operating costs and overhead.

Residual Income

The income that remains after deducting all required expenses and cost of capital from operating income.

Investment Centers

Segments within a company for which managers have responsibility over cost, revenue, and investment decisions.

Cost Center

A business segment whose manager has control over cost but has no control over revenue or investments in operating assets.