Assume autonomous net taxes fall by $300, and the MPC equals 2/3.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.What is the value of the spending multiplier?
A) 0
B) 1
C) 3
D) 10

Question

Assume autonomous net taxes fall by $300, and the MPC equals 2/3.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.What is the value of the spending multiplier?  
A) 0 
B) 1 
C) 3 
D) 10

Quizplus · Accepted Answer

The spending multiplier (SM) is calculated as 1/MPS, where MPS is the marginal propensity to save. In this case, since the MPC is 2/3, MPS must be 1/3. Thus, SM=1/MPS=1/(1/3)=3. Therefore, a fall in autonomous net taxes by $300 will lead to an increase in total spending by $300 x SM = $300 x 3 = $900. Hence, option C is the correct answer.

Assume Autonomous Net Taxes Fall by $300, and the MPC