In an economy that has no leakages except savings, the government injects $200 of new spending into the economy, and the total spending in the economy increases by $1,000. The spending multiplier in the economy is _____, and the marginal propensity to consume is:
A) 0.8; 0.2.
B) 5; 0.8.
C) 0.2; 0.8.
D) 0.8; 5.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as the ratio of the change in total spending to the change in investment spending, which is $1,000 / $200 = 5. The marginal propensity to consume (MPC) is related to the multiplier by the formula multiplier = 1 / (1 - MPC), so solving for MPC gives MPC = 1 - 1/5 = 0.8.

In an Economy That Has No Leakages Except Savings, the Government