If an economy has no other leakages except savings and the spending multiplier in the economy is 5, then the marginal propensity to consume for the economy is:
A) 0.8.
B) 0.6.
C) 0.4.
D) 0.2.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC) or 1/MPS. Given the multiplier is 5, we can set up the equation 1/(1-MPC) = 5. Solving for MPC gives us 0.8.

If an Economy Has No Other Leakages Except Savings and the Spending