g n a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is a. $60.25. b. $60.75. c. $61.33. d. $64.00.

The answer is option (b) $60.75

Explanation:

Solution

Given that

A certain economy, Income is = $100

Consumer spending is = $60

The value of multiplier is = 4

Now we need to know when the income is $101, consumer spending, the customer spending will be what?

Now,

Multiplier (k) = 1/1-MPC (marginal propensity to consume)

4=1/1-MPC

Thus

MPC = 1-1/4

MPC=3/4

MPC=.75

So,

MPC = Change in consumption/change in income.

.75=Change in C/101-100

Change in C=.75*1

Change in C=.75

Hence

The new consumption = 60+.75=60.75

Therefore, when the income is $101, the consumer spending is $60.75