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Multipliers and Geometric Series: Application to U.S. Economy

Suppose that, throughout the U.S. economy, individuals spend 90% of every additional dollar that they earn. Economists would say that an individual's marginal propensity to consume is 0.90. For example, if Jane earns an additional dollar, she will spend 0.9(1)=$0.90 of it. The individual that earns $0.90(from Jane) will spend 90% of it or $0.81. This process of spending continues and results in an infinite geometric series as follows: 1, 0.90, 0.90^2, 0.90^3, 0.90^4....
The sum of this infinite geometric series is called the multiplier.

a) What is the multiplier if individuals spend 90% of every additional dollar that they earn?

b) Suppose that the marginal propensity to consume throughout the U.S. economy is 0.95. What is the multiplier for the U.S. economy?

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a) What is the multiplier if individuals spend 90% of every additional dollar that they earn?
We know that the sum of ...

Solution Summary

This solution illustrates how multipliers for a geometric series are found. All calculations are included.

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