Refer to Problem 97. Suppose that the marginal propensity to consume throughout the U.S. economy is 0.95. What is the multiplier for the U.S. economy?

Problem 97

Suppose that, throughout the U.S. economy, individuals spend 90% of every additional dollar that they earn. Economists would say that an individual’s marginal propensity to consume is 0.90.  or example, if Jane earns an additional dollar, she will spend of it. The individual that earns $0.90 (from Jane) will spend 90% of it or $0.81. This process of spending continues and results in an infinite geometric series as follows:

1, 0.90, 0.90², 0.90³, 0.90⁴,...........

The sum of this infinite geometric series is called the multiplier.