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JAMB Economics 1997 Question 40

Question 40

National Income

If the marginal propensity to consume is 0.75 and private investment increases by ₦10 billion while government expenditure decreases by ₦15 billion, GDP will decrease by

  1. A.₦12 billion
  2. B.₦15 billion
  3. C.₦20 billion
  4. D.₦25 billion.
Show the answer and explanation

Answer: C (₦20 billion)

Explanation

Multiplier = 1 ÷ (1 − 0.75) = 4. Net change in spending = +10 − 15 = −₦5 billion. GDP change = 4 × (−5) = −₦20 billion.