If an economy's MPC is 0.95 and the MPM is 0.05, then an increase in government spending of $1,000 will increase income by

Question

Quizplus · Accepted Answer

The multiplier effect formula is 1/(1 - MPC - MPM). With an MPC of 0.95 and an MPM of 0.05, the multiplier is 1/(1 - 0.95 - 0.05) = 1/0, which equals 20. Therefore, an increase in government spending of $1,000 will increase income by $1,000 * 20 = $20,000.

If an Economy's MPC Is 0