Question

If the MPC is 0.59, what is the value of the spending μltiplier? Please round to 2 decimal places. Be sure to include a negative sign (-) if it is a decrease and do not include a dollar sign ($) when answering.

a) 0.59
b) 1.69
c) -1.69
d) -0.59

Answer 1

The spending multiplier, given the MPC is 0.59, is calculated as 1 / (1 - MPC), which results in approximately 2.44 after rounding to two decimal places.

Step-by-step explanation:

The question relates to the concept of the spending multiplier in economics, specifically within the field of macroeconomics. The marginal propensity to consume (MPC) is given as 0.59. To calculate the spending multiplier, the formula 1 / (1 - MPC) is used. In this case, it would be 1 / (1 - 0.59) = 1 / 0.41. When calculated, this gives a spending multiplier of approximately 2.44, which means that for every dollar spent, there is an increase in total economic output of approximately $2.44. When we round to two decimal places, the spending multiplier is 2.44.