If the marginal propensity to save is 0.1 and government spending is raised by $5 billion,then total aggregate spending will rise by:
A) $500 million.
B) $5 billion.
C) $10 billion.
D) $50 billion.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. If MPS is 0.1, then MPC is 0.9. The multiplier is 1/(1-0.9) = 10. Therefore, an increase in government spending by $5 billion will increase total aggregate spending by $5 billion * 10 = $50 billion.

If the Marginal Propensity to Save Is 0