Chapter 10, Problem 4E

To determine

(a)

What is the spending multiplier, when $MPC=0.90$ and $MPI=0.10$

Explanation of Solution

We have

  $MPC=0.90$

  $MPI=0.10$

Also, $MPC+MPS=1$

  $MPS=1-MPC$

  $MPS=1-0.90$

  $MPS=0.10$

Thus, multiplier is calculated as

  $Multiplier=\frac{1}{MPS+MPI}$

  $Multiplier=\frac{1}{0.10+0.10}$

  $Multiplier=\frac{1}{0.20}$

  $Multiplier=\frac{10}{2}$

  $Multiplier=\text{ 5}$

Hence, the value of multiplier is $5$

Economics Concept Introduction

Concept Introduction:

Multiplier is defined as the ratio of change in equilibrium income with the initial change in autonomous expenditure

  $Multiplier=\frac{changeinequilibriumincomeorrealGDP}{Changeinautonomous\exp enditure}$

Also, multiplier can be measured from the leakages

  $Multiplier=\frac{1}{Leakages}$

  $Multiplier=\frac{1}{MPS+MPI}$

Where $MPS=$ Marginal Propensity to save

  $MPI=$ Marginal Propensity to invest

To determine

(b)

What is the spending multiplier, when $MPC=0.90$ and $MPI=0.20$

Explanation of Solution

We have

  $MPC=0.90$

  $MPI=0.20$

Also, $MPC+MPS=1$

  $MPS=1-MPC$

  $MPS=1-0.90$

  $MPS=0.10$

Thus, multiplier is calculated as

  $Multiplier=\frac{1}{MPS+MPI}$

  $Multiplier=\frac{1}{0.10+0.20}$

  $Multiplier=\frac{1}{0.30}$

  $Multiplier=\frac{10}{3}$

  $Multiplier=\text{ 3}\text{.34}$

Hence, the value of multiplier is $\text{3}\text{.34}$

Economics Concept Introduction

Concept Introduction:

Multiplier is defined as the ratio of change in equilibrium income with the initial change in autonomous expenditure

  $Multiplier=\frac{changeinequilibriumincomeorrealGDP}{Changeinautonomous\exp enditure}$

Also, multiplier can be measured from the leakages

  $Multiplier=\frac{1}{Leakages}$

  $Multiplier=\frac{1}{MPS+MPI}$

Where $MPS=$ Marginal Propensity to save

  $MPI=$ Marginal Propensity to invest

To determine

(c)

What is the spending multiplier, when $MPC=0.80$ and $MPI=0.30$

Explanation of Solution

We have

  $MPC=0.80$

  $MPI=0.30$

Also, $MPC+MPS=1$

  $MPS=1-MPC$

  $MPS=1-0.80$

  $MPS=0.20$

Thus, multiplier is calculated as

  $Multiplier=\frac{1}{MPS+MPI}$

  $Multiplier=\frac{1}{0.20+0.30}$

  $Multiplier=\frac{1}{0.50}$

  $Multiplier=\frac{10}{5}$

  $Multiplier=\text{ 2}$

Hence, the value of multiplier is $2$

Economics Concept Introduction

Concept Introduction:

Multiplier is defined as the ratio of change in equilibrium income with the initial change in autonomous expenditure

  $Multiplier=\frac{changeinequilibriumincomeorrealGDP}{Changeinautonomous\exp enditure}$

Also, multiplier can be measured from the leakages

  $Multiplier=\frac{1}{Leakages}$

  $Multiplier=\frac{1}{MPS+MPI}$

Where $MPS=$ Marginal Propensity to save

  $MPI=$ Marginal Propensity to invest

To determine

(d)

What is the spending multiplier, when $MPC=0.90$ and $MPI=0$

Explanation of Solution

We have

  $MPC=0.90$

  $MPI=0.10$

Also, $MPC+MPS=1$

  $MPS=1-MPC$

  $MPS=1-0.90$

  $MPS=0.10$

Thus, multiplier is calculated as

  $Multiplier=\frac{1}{MPS+MPI}$

  $Multiplier=\frac{1}{0.10+0}$

  $Multiplier=\frac{1}{0.10}$

  $Multiplier=\frac{10}{1}$

  $Multiplier=10$

Hence, the value of multiplier is $10$

Economics Concept Introduction

Concept Introduction:

Multiplier is defined as the ratio of change in equilibrium income with the initial change in autonomous expenditure

  $Multiplier=\frac{changeinequilibriumincomeorrealGDP}{Changeinautonomous\exp enditure}$

Also, multiplier can be measured from the leakages

  $Multiplier=\frac{1}{Leakages}$

  $Multiplier=\frac{1}{MPS+MPI}$

Where $MPS=$ Marginal Propensity to save

  $MPI=$ Marginal Propensity to invest