Question

In an economy with lump-sum taxes and a marginal propensity to save (MPS) of 0.10, what is the government spending multiplier? Please round your response to one decimal place.

Answer 1

The government spending multiplier in an economy with an MPS of 0.10 is 10.0 when rounded to one decimal place.

Step-by-step explanation:

In an economy with lump-sum taxes and a marginal propensity to save (MPS) of 0.10, the government spending multiplier can be calculated using the formula:

Spending Multiplier = 1 / (1 - MPC) = 1 / (1 - (1 - MPS))

Since the MPS is 0.10, it means the marginal propensity to consume (MPC) is 0.90 (because MPC + MPS = 1). Plugging the values into the formula gives us:

Spending Multiplier = 1 / (1 - 0.90) = 1 / 0.10 = 10.0

Thus, the spending multiplier in this economy is 10.0, rounded to one decimal place.