If the marginal propensity to consume in the economy is 0.8 and the government increases its spending this year by R10 billion, what will be the additional increase in expenditure in the economy next year?

Question

Quizplus · Accepted Answer

The additional increase in expenditure in the economy next year will be the multiplier effect of the government spending. The multiplier is equal to 1/(1-MPC). In this case, the multiplier will be 1/(1-0.8) = 5. Therefore, the additional increase in expenditure next year will be 5 times the initial government spending of R10 billion, which equals R50 billion. However, the question asks for the additional increase, not the total increase. Therefore, the answer is R50 billion - R10 billion = R40 billion. To find the annual increase, we divide the additional increase by the number of years, which is 1. Therefore, the annual increase in expenditure next year will be R40 billion. However, the question asks for the additional increase in expenditure next year, which is the same as the annual increase. Therefore, the answer is R8 billion (R40 billion divided by 5).

If the Marginal Propensity to Consume in the Economy Is