The formula to compute the spending multiplier is:
A) 1 / (MPC + MPS).
B) 1 / (1 − MPC).
C) 1 / (1 − MPS).
D) 1 / (C + I).

Question

Quizplus · Accepted Answer

The spending multiplier is the number by which a change in autonomous expenditure is multiplied to find the resulting change in real GDP. The formula to calculate the spending multiplier is 1 / (1 − MPC), where MPC is the marginal propensity to consume. This formula is derived from the Keynesian spending multiplier model, which assumes that changes in consumption spending directly affect changes in real GDP. Therefore, the best choice is B, as it represents the correct formula to calculate the spending multiplier.

The Formula to Compute the Spending Multiplier Is