Suppose That Marginal Propensity to Consume Is Equal to 0

question 181

Multiple Choice

Suppose that marginal propensity to consume is equal to 0.9 and the government increases its spending by $200 billion. This increase in spending is financed by a $200 billion increase in taxes. As a result of this, GDP will:

• A)not change at all.
• B)decrease by $200 billion.
• C)increase by $2,000 billion.
• D)increase by $200 billion.

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Definitions:

Market Failure

A situation in which the allocation of goods and services by a free market is not efficient, leading to a loss of economic value.

Public Goods

Goods that are non-excludable and non-rivalrous, meaning that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others.

Nonexcludable

A characteristic of a public good where no one can be prevented from using it.

Nonrival

A characteristic of a good or service whereby one person's consumption does not diminish the utility or availability for others.