Figure 9-5

In Figure 9-5, if the second round effect of an increase in autonomous spending of $100,000 is $75,000, then the multiplier is

Question

Figure 9-5

In Figure 9-5, if the second round effect of an increase in autonomous spending of $100,000 is $75,000, then the multiplier is

Quizplus · Accepted Answer

The multiplier equals 1 / (1 - MPC), where MPC (marginal propensity to consume) is the fraction of each additional dollar of disposable income that households consume rather than save. If the second round effect of an increase in autonomous spending is $75,000, then the total increase in real GDP is $175,000 ($100,000 from the initial increase plus $75,000 from the second round effect). Therefore, the multiplier is 1.75. Solving for MPC, we get MPC = 0.75. Thus, the multiplier equals 1 / (1 - 0.75) = 4.

Figure 9-5 in Figure 9-5, If the Second Round Effect of an Effect