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 $400. The marginal propensity to consume is:
A) 0.7.
B) 0.5.
C) 0.3.
D) 0.1.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is calculated using the multiplier effect formula: Multiplier = 1 / (1 - MPC). Given that the total increase in spending is $400 from an initial government injection of $200, the multiplier is 400 / 200 = 2. Rearranging the multiplier formula to solve for MPC gives MPC = 1 - (1 / Multiplier), so MPC = 1 - (1 / 2) = 0.5.

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