Question

Assume that the mpc is equal to 0.80. given the total amount of the second round of stimulus payments, total spending will increase by $ billion.

Answer 1

The marginal propensity to consume (MPC) is 0.80, which means an initial stimulus increase in spending leads to ripple effects in the economy. The spending multiplier with an MPC of 0.80 is 5, meaning that the total spending increases by five times the amount of the initial stimulus.

Step-by-step explanation:

When dealing with macroeconomics and fiscal stimulus, the concept of the marginal propensity to consume (MPC) is crucial in calculating the overall impact on the economy. Given that the MPC is 0.80, every dollar increase in income leads to an additional $0.80 of consumption. Since the MPS (marginal propensity to save) is the flip side of MPC and is calculated as 1 - MPC, in this case, it would be 0.20 or 20%. With an MPC of 0.80, an initial government stimulus that increases spending results in more rounds of spending, magnified by the spending multiplier. The spending multiplier can be calculated as 1/(1 - MPC), which would be 1/(1 - 0.80) = 5. Therefore, if the second round of stimulus payments was, for example, $100 billion, the total increase in spending would be 5 times that amount, which equals $500 billion. This is how an initial injection of spending can lead to a larger overall increase in total spending within the economy.

Answer 2

The concept of the multiplier effect is used to calculate the total increase in spending resulting from a change such as a stimulus, given the MPC of 0.80. The spending multiplier, in this case, is 5, which means the initial change in spending is magnified fivefold throughout the economy. Thus, a second round stimulus payment changing spending by $100 billion will lead to a $500 billion increase in total economic spending.

Step-by-step explanation:

When the marginal propensity to consume (MPC) is 0.80, it implies that for every additional dollar of income, consumption will increase by $0.80. The remaining $0.20 represents the marginal propensity to save (MPS). If we apply the concept of the multiplier effect, which is the expansion of a country's money supply that results from banks being able to lend, we can calculate the total increase in spending from a stimulus.

Given an initial change in spending, we use the spending multiplier to determine the total impact on the economy. The spending multiplier is calculated as 1 / (1 - MPC), which in this case would be 1 / (1 - 0.8) or 5. Therefore, if the government issues a second round of stimulus payments that changes total spending by $100 billion, the total increase in spending in the economy would be $100 billion multiplied by the spending multiplier, resulting in a $500 billion increase in total spending.

In this scenario, the stimulus payments initiate a chain reaction of spending, where each round prompts further consumption according to the MPC. Over time, the effect of the original stimulus diminishes, but it still results in a larger overall increase in economic activity than the initial amount of spending.