Question

When autonomous expenditure increases by 10 and the MPC is 0.8, the increase in consumption (and aggregate demand) in the round immediately after the initial income rise of 10 is:

Options

• \[0.8 \times 10\]

• \[(0.8)^2 \times 10\]

• 0

• 10

Answer 1

After the initial increase in output and income of 10, people spend 0.8 (the MPC) fraction of the extra income on consumption. Hence consumption and aggregate demand rise by \[0.8 \times 10 = 8\], creating excess demand of the same amount.