Suppose consumer spending increases by 10 billion dollars. If the MPC=.75, what is the total impact of the multiplier effect on the economy?

Answer 1

The spending multiplier is 1/MPS. Since MPC = 0.75, then MPS = 0.25. Thus, the spending multiplier is 4. Spending increase of $10 billion can have up to a $40 billion impact on the economy.