Given that the marginal propensity to consume (MPC) is .875:
(1) What is the marginal propensity to save (MPS)?
(2) Calculate the spending multiplier.
(3) If the government stimulates the economy via new spending of $150 million:
(a) What is the total projected spending that this could generate throughout the economy?
(b) What incremental spending would be generated?
1. MPS = 1 - MPC = 1 - 0.875 = 0.125
2. Spending Multiplier = 1/MPS = 1/0.125 ...
Given an economy's Marginal Propensity to Consume (MPC), this solution shows how to calculate the economy's Marginal Propensity to Save (MPS), Spending Multiplier (SM), and the total and incremental increase in spending in the economy that results from an increase in government spending. All formulas and calculations are given in full.
Calculating the Equilibrium Output Level
The economy of Alphaland is represented by the following:
C= 50 +0.25Yd
(a) Calculate the equilibrium level of output. Graph your solution.
(b) If the government spending increases by 50 what is the new equilibrium level of output? Use the government spending multiplier.
(c) If the government increases taxes by 50 what is the new equilibrium level of output? Use the tax multiplier.
(d) If the government increases taxes and spending by 50 what is the new equilibrium level of output?
(e) Calculate the equilibrium level of output in case where taxes depend on income according to the following: T=-25+0.125Y.