Question

"Because of a recession in Japan, net exports from the United States decrease by $10 billion. If the MPC is 0.75, how much less spending will occur in the U.S. economy in the second “round” of spending?"

Answer 1

Answer:

Spending will decrease by $7.5 billion.

Explanation:

The value of MPC is 0.75.

There is a decline in net exports by $10 billion.

This means that the aggregate income will fall by $10 billion.

Change in spending

= $change\ in\ income\ \times\ MPC$

= $-10\ billion\ \times\ 0.75$

= - $7.5 billion

So, in the second round the spending will fall by $7.5 billion.