If the marginal propensity to consume is 0.75, how much is the spending multiplier? If the...

If the marginal propensity to consume is 0.75, how much is the spending multiplier? If the marginal propensity to consume drops to 0.5, how much is the new spending multiplier?

Expert Solution

Solution:-

Spending multiplier = 1 / (1 - MPC)

= 1 / (1 - 0.75)

= 1 / 0.25

= 4

If the marginal propensity to consume drops to 0.5.

New Spending multiplier = 1 / (1 - MPC)

= 1 / (1 - 0.50)

= 1 / 0.50

= 2

Rahul Sunny answered 2 years ago

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