Find solution
The MPC for an economy is?

If the MPC in a economy is 0.9, a $1 billion increase in government spendig will increase consumption by what?

  • these are the choice a. 1 billion b. .9 billion c. 10 billion d. 9 billion i'm having hard time figuring this problem out for macroeconomics. if someone can help me understand it, it would be a big help. please show me how you reached the answer. thanks

  • Answer:

    Jenkins' answer is wrong because it ignores the multiplier effect. The $1bil fiscal injection will add $1bil in consumption, but the recipients of the $1Bil will spend .9*$1bil=900mil and the recipients of that will spend .9^2*$1bil=810mil. As this process continues, it converges to $1bil/(1-MPC) or $10bil. So the answer is C.

doris g at Yahoo! Answers Visit the source

Was this solution helpful to you?

Other answers

Multiply 1 billion x .9 to get .9 billion. The MPC shows for every additional $ earned, what value is spent on consumption. So an MPC of .9 shows that for every extra dollar earned, 90 cents is spent and 10 cents is saved.

jenkinsrhys

Use the formula: Multiplier=1/1-MPC Input the numbers: Multiplier=1/1-0.9 Do the math: Multiplier=10 Now multiply the amount the government spent: $1billion*10=$10billion C is the answer

Vaio

Related Q & A:

Just Added Q & A:

Find solution

For every problem there is a solution! Proved by Solucija.

  • Got an issue and looking for advice?

  • Ask Solucija to search every corner of the Web for help.

  • Get workable solutions and helpful tips in a moment.

Just ask Solucija about an issue you face and immediately get a list of ready solutions, answers and tips from other Internet users. We always provide the most suitable and complete answer to your question at the top, along with a few good alternatives below.