Author Question: If the multiplier is 10, then the marginal propensity to consume (MPC) is A) 9. B) 1. C) 0.9. D) ... (Read 19 times)

CBme · **on:** Jun 30, 2018

If the multiplier is 10, then the marginal propensity to consume (MPC) is

A) 9. B) 1. C) 0.9. D) 0.1.

Question 2

Explain the concept of crowding out in a closed economy.

What will be an ideal response?

joshbk44 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

C

Answer to Question 2

In a closed economy, GDP consists of consumer spending, investment spending and government purchases. If we consider the economy to be at full employment, then GDP is considered fixed. If government spending increases, other components of the fixed GDP must decrease. In this sense, increased government spending reduces, or crowds out other components of GDPinvestment spending and/or consumer spending.