Chapter 16, Problem 6MCQ

To determine

The question requires us to determine the value of the spending multiplier.

Explanation of Solution

The spending multiplier shows the impact of change in aggregate spending on the real GDP. The expression for spending multiplier is the following:

  $\begin{array}{l}\frac{\text{ΔY}}{\text{ΔAS}}\text{=}\frac{\text{1}}{\text{1-MPC}}\\ \frac{\text{ΔY}}{\text{ΔAS}}\text{=}\frac{\text{1}}{\text{MPS}}\end{array}$

Since, $\text{MPS+MPC=1}$

Given, MPS = 0.1

Spending multiplier is:

  $\begin{array}{c}\frac{\text{ΔY}}{\text{ΔAS}}\text{=}\frac{\text{1}}{\text{MPS}}\\ \text{=}\frac{\text{1}}{\text{0}\text{.1}}\\ \text{=10}\end{array}$

Therefore, the value of the spending multiplier is 10.

Option “e” is correct.