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 0.86 MPC = 0.75 MPC -0.86 Change in Spending Cumulative Increase Change in Spending Cumulative Increase Spending during Cycle in Spending during Cycle in Spending Cycles (billions per year) (billions per year) (billions per year (billions per year) 1 S100 00 S 100.00 $100.00 2 7500 175.00 3 56 25 231 25 42 18 273.44 4 b Given that the MPC is higher how much more consumption occurs in the first four cycles when the MPC 0.86 as compared to when the MPC = 0.757 billion What is the value of the multiplier b) if the MPC = 0757 (ii) if the MPC = 0 86%

Answer 1

(a)  

Spending cycles	Changes in spending during cycle (Billions per year) , MPC = 0.75	Cumulative increase in spending (Billions per yerar), MPC= 0.75	Change in spending during cycle (Billions per year), MPC= 0.86	Cumulative increase in spending (Billions per year), MPC = 0.86
1	100	100	100	-
2	75	175	(100)(0.86)=86	(100+86)= 186
3	56.25	231.25	(86)(0.86)= 73.96	(186+73.96)=259.96
4	42.18	273.44	(73.96)(0.86)= 63.61	(259.96+63.61)= 323.57

(b) Given that MPC is higher , then consumption is more by (323.57-273.44) billion= $50.13 billion , if MPC=0.86 as compared to when MPC=0.75.

(c) If MPC=0.75 , Multiplier = 1/1-MPC = 1/1-0.75 = 1/0.25 = 4.

If MPC= 0.86 , Multiplier = 1/1-MPC = 1/1-0.86 = 1/0.14 = 7.14.