Question

The multiplier process depicted in the following table is based on an MPC of 0.75. a. Recompute the first four cycles using an MPC of 0.92. MPC = 0.75 MPC = 0.92 Spending Cycles Change in Spending during Cycle Cumulative Increase in Spending Change in Spending during Cycle Cumulative Increase in Spending (billions per year) (billions per year) (billions per year) (billions per year) 1 $100.00 $100.00 $100.00 2 75.00 175.00 3 56.25 231.25 4 42.18 273.44 b. Given that the MPC is higher, how much more consumption occurs in the first four cycles when the MPC = 0.92 as compared to when the MPC = 0.75? billion c. What is the value of the multiplier (i) if the MPC = 0.75? 4.00 (ii) if the MPC = 0.92? 12.50

Answer 1

MPC = 0.92
Spending cycles	Change in spending during cycle (billions per year)	Cumulative increase in spending (billions per year)
1	100	100
2	92	192
3	84.64	276.64
4	77.8688	354.5088

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 = 0.92 ) during first four cycles = $354.5088 billions.

Therefore, the consumption spending in first four cycles is higher by $81.0688 billion when MPC is 0.92 as compared to MPC = 0.75.

Answer: $81.0688 billion.

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Multiplier = 1 / (1 - MPC)

If MPC = 0.75

=> Multiplier = 1/ (1-0.75) = 1/0.25 = 4

If MPC = 0.92

=> Multiplier = 1 / (1 - 0.92) = 1 / 0.08 = 12.5