In: Economics
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MPC = 0.85 | ||
Spending cycles | Change in spending during cycle (billions per year) | Cumulative increase in spending (billions per year) |
1 | 100 | 100 |
2 | 85 | 185 |
3 | 72.25 | 257.25 |
4 | 61.41 | 318.66 |
Change in Spending = MPC * (Change in spending during previous spending cycle)
Cumulative increase in spending = Sum of (change in Spending)
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Cumulative increase in spending (when MPC = 0.75 ) during first four cycles = $273.44 billions.
Cumulative increase in spending (when MPC = 0.85 ) during first four cycles = $318.66 billions.
Therefore, the consumption spending in first four cycles is higher by $45.22 billion when MPC is 0.85 as compared to MPC = 0.75.
Answer: $45.22 billion.
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Multiplier = 1 / (1 - MPC)
If MPC = 0.75
=> Multiplier = 1/ (1-0.75) = 1/0.25 = 4
If MPC = 0.85
=> Multiplier = 1 / (1 - 0.85) = 1 / 0.15 = 6.67