Question

Suppose the government injects $1,000 into the economy and the marginal propensity to consume (MPC) is 0.8. The initial round of spending adds $1,000 to the economy, while round 2 adds $ and round 3 adds $ . Give your answer to two decimals.

Answer 1

Answer:

Round 2 adds =$800

Round 3 adds =$640

Explanation:

Marginal propensity to consume is the aggregate increase in spending by a consumer for each additional $ they earn. So a Marginal Propensity to consume of 0.8 means that each consumer in the economy consumes 80% of any additional dollars they earn, while they save 20% which is also the marginal propensity to save that is 0.2

So First round adds $1000

Second round adds $1000 * 0.8 = $800 as people use 80% of $1000

Third round adds $800 * 0.8 =$640  as people use 80% of $800

while the remaining is saved.

Hope that helps.