CIMA BA1 · Chapter 1 · Question 6 of 10
In a closed economy with no government sector, the marginal propensity to consume is 0.8. Investment increases by $40m. By how much will equilibrium national income increase?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) $200m
Explanation
The multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 5. The increase in national income = 5 x $40m = $200m.
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