The marginal propensity to consume for an economy is 0.8. When the government injects $200 into the economy by purchasing military equipment, the total spending in the economy increases by $1,000. Given this scenario, which of the following statements is FALSE for the economy?
A) The marginal propensity to save is 0.2.
B) Savings are not the only source of leakage.
C) The spending multiplier is 5.
D) The spending multiplier is more than 5.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1 - marginal propensity to consume), which is 1/(1 - 0.8) = 5. This means for every dollar injected into the economy, total spending increases by $5. Since the total increase in spending is $1,000 from a $200 injection, the multiplier is exactly 5, not more than 5, making statement D false.

The Marginal Propensity to Consume for an Economy Is 0