How to find the spending multiplier?
Understand the Problem
The question is asking for the method to calculate the spending multiplier, which typically refers to the concept in economics that describes how a change in spending (government expenditure, for example) can lead to a larger change in overall economic output. This requires an understanding of marginal propensity to consume and the formula for the spending multiplier.
Answer
1 / MPS
The spending multiplier is calculated using the formula: 1 divided by the marginal propensity to save (MPS).
Answer for screen readers
The spending multiplier is calculated using the formula: 1 divided by the marginal propensity to save (MPS).
More Information
The spending multiplier quantifies the impact of a change in autonomous spending on the overall economy's GDP. A higher MPS results in a lower spending multiplier, and vice versa.
Tips
A common mistake is confusing MPS with MPC (marginal propensity to consume). Remember that MPS = 1 - MPC.
Sources
- Lesson summary: The expenditure and tax multipliers - Khan Academy - pl.khanacademy.org
- The Spending Multiplier in the Income-Expenditure Model - courses.lumenlearning.com
- 3.2 Spending and Tax Multipliers - AP Macroeconomics - Fiveable - library.fiveable.me
