If households save $0.40 of each additional dollar of increased income and spend the rest,the expenditure multiplier will be

Question

Quizplus · Accepted Answer

The expenditure multiplier is given by the formula: 1/(1-MPC), where MPC is the marginal propensity to consume, which is equal to 1 - MPS (marginal propensity to save). In this case, MPC = 1 - 0.4 = 0.6. Therefore, the expenditure multiplier is 1/(1-0.6) = 2.5. This means that for every additional dollar of income, total spending in the economy will increase by $2.50.

If Households Save $0