In the expenditure-output model if the MPC is 0.90 and the initial decrease in g
ID: 1123071 • Letter: I
Question
In the expenditure-output model if the MPC is 0.90 and the initial decrease in govenment spending is $200 then Multiple Choice The change in total spending is $1,000 and the AE curve shifts down to equilibrium full em ployment The change in total spending is $1,000 and the AE curve shits up to equllbrium fullempleyment The change in total spending is $2.000 and the AE curve shifts up to equilibrlium full employment The change in total spending is $2.000 end the AE curve shifts down to equilibrium full employmentExplanation / Answer
Answer
Option fourth
the spending multiplier
=1/(1-MPC)
=1/(1-0.9)
=10
the decrease in spending=decrease in spending *spending multiplier
=200*10=2000
the decrease in spending decreases AE
option fourth