164k views
3 votes
MPS = 0.1. What is the government spending multiplier?

User Tamina
by
8.3k points

1 Answer

5 votes

Final answer:

With an MPS of 0.1, the spending multiplier is calculated as 1 / (1 - MPC) which is 10. This calculation assumes no taxes or imports are considered.

Step-by-step explanation:

If the Marginal Propensity to Save (MPS) is 0.1, the corresponding Marginal Propensity to Consume (MPC) would be equal to 1 - MPS, which is 0.9 in this case.

To calculate the government spending multiplier, formula usually used is 1 / (1 - MPC), adjusting for tax rate and marginal propensity to import.

However, given the initial MPS value, if we don't consider taxes and imports, the government spending multiplier would simply be 1 / (1 - 0.9), which results in a multiplier of 10.

This means that a dollar of government spending could potentially lead to a tenfold increase in economic output under these simplified assumptions.

User Katelynn
by
8.3k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.