Suppose the MPC = 0.6? What will be the government spending multiplier? If, in this
economy, government spending (G) increases by $20, what will happen to Total Spending?
The government spending multiplier can be calculated as:
Government Spending Multiplier = 1 / (1 - MPC)
In this case, since the MPC is 0.6, the government spending multiplier will be:
Government Spending Multiplier = 1 / (1 - 0.6) = 1 / 0.4 = 2.5
So, the government spending multiplier is 2.5.
If government spending (G) increases by $20, we can calculate the change in Total Spending using the government spending multiplier as follows:
Change in Total Spending = Government Spending Multiplier * Change in Government Spending
Change in Total Spending = 2.5 * $20 = $50
Therefore, if government spending increases by $20, Total Spending will increase by $50.
To calculate the government spending multiplier, we can use the formula:
Government spending multiplier = 1 / (1 - MPC)
Given that the marginal propensity to consume (MPC) is 0.6, we can substitute this value into the formula:
Government spending multiplier = 1 / (1 - 0.6)
= 1 / 0.4
= 2.5
Therefore, the government spending multiplier is 2.5.
Now, let's calculate the change in total spending when government spending (G) increases by $20.
Change in total spending = Government spending multiplier * Change in government spending
Change in total spending = 2.5 * $20
= $50
So, if government spending increases by $20, total spending in this economy will increase by $50.