The spending multiplier, m, is 1/(1 MPC). a) If the MPC is 0.9, what is the...

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The spending multiplier, m, is 1/(1 MPC). a) If the MPC is 0.9, what is the spending multiplier? b) Now suppose government sp

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Answer 1

Answer #1

a) If the MPC is 0.9, What is the spending multiplier?

Spending Multiplier = 1/ (1 - MPC)

Spending Multiplier = 1/ (1 - 0.9)

Spending Multiplier = 1/ (0.1)

Spending Multiplier = 10

b) Now suppose government spending increases by $90 million. By how much will GDP rise?

Rise in GDP = Increase in government spending x Spending Multiplier

Rise in GDP = $90 million x 10

Rise in GDP = $900 million

Basically, this formula explains the magnitude of change in GDP with a change in government spending.

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Answer 2

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