Let AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment, JG = Government Purchases. Consider a simple aggregate expenditures model, where JAE = C + I_P + G and all components of aggregate expenditures except consumption are autonomous. In this model, the multiplier is _____. A) 1 ÷ (1 -MPS) where MPS = marginal propensity to save B) 1 ÷ MPC where MPC = marginal propensity to consume C) 1 ÷ MPS where MPS = marginal propensity to save D) MPC ÷ MPS ÷ ∆Y

Question

Quizplus · Accepted Answer

In this simple model, all components of aggregate expenditures except consumption are considered autonomous, meaning that they do not depend on disposable income. We can use the formula for the spending multiplier, which is 1 ÷ MPS, where MPS is the marginal propensity to save. This is because the higher the MPS, the lower the MPC (marginal propensity to consume), and the lower the multiplier. Thus, option C is the correct choice for the multiplier formula.

Let AE = Aggregate Expenditures, C = Consumption, IP =

Let AE = Aggregate Expenditures, C = Consumption, I_P =