Suppose economists observe that an increase in government spending of $15 billion raises the total demand for goods and services by $60 billion. If these economists ignore the possibility of crowding out, they would estimate the marginal propensity to consume (MPC) to be . a. 1/4
b. 3/4
c. 1/4
d. 4

Now suppose the economists allow for crowding out. Would their new estimate of the MPC be larger or smaller than their initial one?

Option B, 3/4 is correct answer.

Explanation:

Given an increase in government spending = $15 billion.

The increase in total demand for goods and services = $60 billion.

Firs calculate the expenditure multiplier by dividing the increase in demand for goods and services with an increase in government spending.

Expenditure multiplier  = 60 / 15 = 4

Now find the MPC with the help of expenditure multiplier.

Thus, option B is correct.

Now solve for the second case, the allow for crowding out.

If there is crowding out that means multiplier will be higher than initial multiplier.

Thus, the new MPC will be greater than the previous one.

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