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:

Creditors' Risk

The risk to lenders that a borrower will not repay a loan or other credit extended, potentially leading to financial loss.

Liabilities

Economic dues a company is obligated to clear with others, which involves dispensing economic benefits progressively over time.

Stockholder's Equity

Ownership interest represented by what remains of a company's assets once all liabilities have been deducted.

Assets

Resources owned by a business that have economic value and can be used to meet debts or generate income.