When the total income of an economy is $1,000, the consumption spending is $900. If the total income increases to $1,500, then consumption spending increases to $1,300. Assuming that the only leakage in the economy is saving, the spending multiplier for the economy is:

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Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, MPC = (1300-900)/(1500-1000) = 0.8. Therefore, the spending multiplier is 1/(1-0.8) = 5.

When the Total Income of an Economy Is $1,000, the Consumption