Scenario 10.1
Imagine an economy that does not have international trade and is initially in equilibrium. Later the government increases the level of spending by $350 million because it received a gift from abroad. In this economy, only 65 cents of every dollar is spent, and the rest is saved.
-Refer to Scenario 10.1. Calculate the value of the spending multiplier for this economy.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Here, MPC is 0.65, so the multiplier is 1/(1-0.65) = 1/0.35 = 2.86.

Scenario 10.1 Imagine an Economy That Does Not Have International Trade and Trade