Let AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment, G = Government Purchases. Consider a simple aggregate expenditures model, where AE = C + I_P + G and all components of aggregate expenditures except consumption are autonomous. In this model, the multiplier is _____. A) 1 ÷ (1 - MPS) where MPS = marginal propensity to save B) 1 ÷ MPC where MPC = marginal propensity to consume C) 1 ÷ MPS where MPS = marginal propensity to save D) MPC ÷ MPS ÷ ∆Y

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Quizplus · Accepted Answer

In this model, all components of aggregate expenditures except consumption are autonomous, meaning they do not depend on income. Hence, the spending multiplier is equal to 1/(1-MPS), where MPS is the marginal propensity to save. This is because an increase in autonomous spending will lead to a change in real income, which in turn will cause a change in consumption, and a change in savings. The numerator and denominator of option D cancel out each other, and hence it is not the correct choice. Option A is incorrect because it represents the formula for the government spending multiplier, which is different from the overall spending multiplier. Option B is incorrect because it represents the formula for the income multiplier, which is also different from the overall spending multiplier.

Let AE = Aggregate Expenditures, C = Consumption, IP =

Let AE = Aggregate Expenditures, C = Consumption, I_P =