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Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40.The marginal propensity to consume (MPC) for this economy is ???, and the spending multiplier for this economy is ???.

Respuesta :

Nyctalus

Answer: Marginal propensity to consume = $0.60

              Spending multiplier = $2.5

Explanation: The MPC can be calculated using following equation :-

[tex]MPC=\frac{change\:in\:consumption}{change\:in\:spending}[/tex]

[tex]MPC=\frac{\$0.60}{\$1}[/tex]

               = 0.60

Similarly, we can calculate spending multiplier as :-

[tex]Spending\:multiplier\:=\:\frac{1}{1-MPC}[/tex]

[tex]Spending\:multiplier\:=\:\frac{1}{1-0.60}[/tex]

                                            = $2.5

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