CFA Level 1: Marginal Propensity to Consume and Investment Impact

CFA Level 1 Exam: Marginal Propensity to Consume and Investment Impact

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Question

If the resources of an economy were fully employed and the marginal propensity to consume were 0.75, a $10 billion increase in investment would cause

Answers

A. real income to rise $40 billion.

B. real income to rise $80 billion.

C. real income to rise $20 billion.

D. inflation to increase.

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Explanations

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A. B. C. D.

When the economy is operating at full employment capacity, increases in aggregate demand cannot be accommodated by increases in output. Instead, increases in aggregate demand are met simply by price increases due to the heightened competition for output.

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