Suppose that, throughout the U.S. economy, individuals spend 90% of every additional dollar that they earn. Economists
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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. For 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. What is the multiplier if individuals spend 90% of every additional dollar that they earn?
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