Question

. The marginal propensity to consume in a city is 0.7 and the marginal propensity to import is 0.1. A team proposes a new stadium construction project that will generate $6 million in spending.

A. Using multiplier effects, how much will the project generate in total?

B. Why is it likely that the actual increase in new income will be much smaller?

Answer 1

M. P. C o .7 M:P-I – 0:1 Mene spending is $6 million Muliflies I -M.P.G & M.P. I - - 1 - 1-0-7+0.1 ²1 - 0.4. so Project will generate around=1 04 komillas > 15 million This is because of multiplier effect that actual increase in income is smaller Every time there is injection of demand into a cirular flove of income, there is likely to be a multiplier effect. This is because of injection of extra income lead to more spending 2 which create more income and so on.