The multiplier for changes in government spending is calculated as
A) 1/MPC.
B) 1/1 - MPC).
C) MPC/1 - MPC).
D) 1 - MPC)/MPC.

Question

Quizplus · Accepted Answer

The multiplier for changes in government spending is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. This is because every dollar increase in government spending leads to an increase in income which in turn increases consumption, and a portion of this additional consumption is again spent, leading to a further increase in income and so on. The value of the multiplier depends on the marginal propensity to consume (MPC) which measures the fraction of additional income that consumers will spend.

The Multiplier for Changes in Government Spending Is Calculated as