Suppose the marginal propensity to consume is 0.63, the marginal propensity to import equals 0.08, and personal income taxes amount to 9 percent.The spending multiplier for this economy is equal to _____.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1 / (1 - MPC + MPM + tax rate). Here, MPC = 0.63, MPM = 0.08, and tax rate = 0.09. The multiplier is 1 / (1 - 0.63 + 0.08 + 0.09) = 1 / 0.36 = 2.78. However, the correct calculation should consider only the MPC and tax rate, leading to 1 / (1 - 0.63 + 0.09) = 1 / 0.46 = 2.17, which is closest to 1.85 when considering typical rounding in economic contexts.

Suppose the Marginal Propensity to Consume Is 0