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Scenario: Fiscal Policy
Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs.
-(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. The government spending multiplier is:
A)5.
B)0.75.
C)4.
D)3.

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Quizplus · Accepted Answer

The government spending multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, the MPC is 0.75 (since households spend 75% of any increase in income), so the government spending multiplier is 1/(1-0.75) = 4.

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