When money is spent on goods and services, those that receive the money also spe

Question

When money is spent on goods and services, those that receive the money also spend some of it. The people receiving some of the twice-spent money will spend some of that, and so on. Economists call this chain reaction the multiplier effect. In a hypothetical isolated community, the local government begins the process by spending D dollars. Suppose that each recipient of spent money spends 100c% and saves 100s% of the money that he or she receives. The values c and s are called the marginal propensity to consume and the marginal propensity to save and, of course, c + s = 1.
The number k = 1/s is called the multiplier. What is the multiplier if the marginal propensity to consume is 60%?

Question 3 options:

a) 3.5

b) 1.5

c) 2.5

Can you show work pleas! Thanks

Can you show work pleas! Thanks

Explanation / Answer

Marginal propensity to consume, c = 60% = 0.6

So, marginal propensity to save = 1 - 0.6 ---> s = 0.4

k = 1/s

k = 1 / 0.4

k = 10/4

k = 5/2

So, k = 2.5

Option C

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