If the marginal propensity to save is 0.1, then the government spending multiplier has a value of
A)0.1.
B)9.
C)10.
D)0.11.

Question

Quizplus · Accepted Answer

The government spending multiplier equals 1/(1-MPC), where MPC is the marginal propensity to consume. Since the problem gives us the MPC's complement, the marginal propensity to save, we can find the MPC by subtracting the MPS from 1 (MPC = 1 - MPS). Therefore, the MPC in this problem is 0.9. Plugging this into the formula for the multiplier, we get:
multiplier = 1/(1-MPC) = 1/(1-0.9) = 10. Thus, the answer is C.

If the Marginal Propensity to Save Is 0