In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 3. It follows that, when income is $101, consumer spending is
A)$60.60.
B)$60.67.
C)$61.33.
D)$63.00.

Question

Quizplus · Accepted Answer

The multiplier is the reciprocal of the marginal propensity to save (MPS). MPS = 1 - MPC, where MPC is the marginal propensity to consume. In this case, MPC = 60/100 = 0.6, so MPS = 1 - 0.6 = 0.4. Therefore, the multiplier is 1/MPS = 1/0.4 = 2.5. When income increases by $1, consumer spending increases by $2.5. Therefore, when income is $101, consumer spending is $60 + $2.5 = $60.67.

In a Certain Economy, When Income Is $100, Consumer Spending