In: Economics
Given that an increase in government spending is \(\$ 10\) billion and the total demand for goods and services is \(\$ 30\) billion.
Calculate Multiplier:
$$ \begin{aligned} \text { Multiplier } &=\frac{\text { Demand for gooods and services }}{\text { Government Spending }} \\ &=\frac{30}{10} \\ &=3 \end{aligned} $$
Calculate \(M P C:\)
$$ \begin{aligned} \text { Multiplier } &=\frac{1}{1-M P C} \\ 1-M P C(\text { Multiplier }) &=1 \\ (1-M P C) 3 &=1 \\ 3-3 M P C &=1 \\ 3 M P C &=2 \\ M P C &=\frac{2}{3} \end{aligned} $$
Therefore, the value of Marginal Propensity to Consume is \(\frac{2}{3}\)
If the economists allow for crowding out then the new estimate of \(M P C\) would be larger than the initial one.