If the Marginal Propensity to Consume (MPC) Is 0

question 8

Multiple Choice

If the marginal propensity to consume (MPC) is 0.75 and government purchases increase by $100 billion, then

• A) equilibrium real Gross Domestic Product (GDP) will increase by $400 billion.
• B) equilibrium real Gross Domestic Product (GDP) will increase by $200 billion.
• C) equilibrium real Gross Domestic Product (GDP) will increase by $40 billion.
• D) the effect on equilibrium real Gross Domestic Product (GDP) cannot be determined from the given information.

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Definitions:

New Borrowings

Funds that a company or government secures by entering into a new loan agreement.

Coupon Rates

The coupon rate is the annual interest rate paid on a bond, expressed as a percentage of the face value.

Similar Risk

Refers to investments or assets that have comparable levels of uncertainty and potential for financial loss or gain.

Weighted Average Cost of Capital (WACC)

The average rate of return a company is expected to pay its security holders to finance its assets, integrating different sources of finance weighted by their proportional usage.