Question

5) Fill in the blanks in the table below. Assume that the MPC is constant over everyone in the economy.

MPC	Spending multiplier	Change in Government Spending	Change in Income
	10	50
	2.5		-800
0.5		425
0.2			1200

Answer 1

MPC	Spending multiplier	Change in Government Spending	Change in Income
0.9	10	50	50*10 = 500
0.6	2.5	-800/2.5 = -320	-800
0.5	2	425	425*2 = 850
0.2	1.25	1200/1.25 = 960	1200

Notes:

Spending multiplier = 1/(1-MPC)

So, when spending multiplier is 10:

10 = 1/(1-MPC)

Or, 10-10MPC = 1

Or, -10MPC = 1-10 = -9

Or, MPC = -9/-10 = 0.9

So, when spending multiplier is 2.5:

2.5 = 1/(1-MPC)

Or, 2.5-2.5MPC = 1

Or, -2.5MPC = 1-2.5 = -1.5

Or, MPC = -1.5/-2.5 = 0.6

When MPC is 0.5 spending multiplier = 1/(1-0.5) = 2

When MPC is 0.2 spending multiplier = 1/(1-0.2) = 1/0.8 = 1.25

Change in income = change in government expenditure * spending multiplier.