Answer: The MPC is 0.1 or 10%, indicating that for every dollar decrease in income, consumption on domestic items decreases by $0.1 million.
- The MPW cannot be determined based on the given information.
- The spending multiplier is approximately 1.11, suggesting that a decrease in income of $9 million will lead to a total decrease in output of approximately $10 million (1.11 times the initial change in spending
Step-by-step explanation:
To determine the MPC (Marginal Propensity to Consume), MPW (Marginal Propensity to Withdraw), and the spending multiplier, we need to analyze the relationship between the decrease in income and the drop in consumption on domestic items.
1. MPC (Marginal Propensity to Consume):
MPC measures the change in consumption resulting from a change in income. In this case, the $9 million decrease in income leads to a $0.9 million drop in consumption on domestic items.
To calculate MPC, we divide the change in consumption by the change in income:
MPC = Change in consumption / Change in income
MPC = $0.9 million / $9 million
MPC = 0.1
Therefore, the MPC is 0.1 or 10%.
2. MPW (Marginal Propensity to Withdraw):
MPW measures the portion of each additional dollar of income that is withdrawn from the circular flow of income through savings, taxes, or imports.
Since the question does not provide information about savings, taxes, or imports, we cannot determine the MPW in this case.
3. Spending Multiplier:
The spending multiplier determines the total change in income resulting from an initial change in spending. It is calculated as the inverse of the MPC or 1 / (1 - MPC).
In this case, the MPC is 0.1, so the spending multiplier can be calculated as:
Spending Multiplier = 1 / (1 - MPC)
Spending Multiplier = 1 / (1 - 0.1)
Spending Multiplier = 1 / 0.9
Spending Multiplier ≈ 1.11
Therefore, the spending multiplier is approximately 1.11.