Assume there is no government or foreign setor, If the MPC is 75 a Rs20 million decrease in planned investment will cause aggregate output to decrease by ?
Correct answer: A. Rs80 million
- A. Rs80 million
- B. Rs20 million
- C. Rs 15 million
- D. Rs26.67 million
Explanation
With no government or foreign sector, the spending multiplier is 1/(1−MPC) = 1/0.25 = 4. A Rs20 million fall in investment therefore reduces aggregate output by 4 × 20 = Rs80 million.
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