Question

Explain what the spending multiplier is.

Answer 1

Solution:-Here spending multiplier is a one of fiscal multiplier,it's maily related to an economic measure of the effect that a change in government spending and investment has on the Gross Domestic Product of a country. In other words, it measures how GDP increases or decreases when the government increases or decreases spending in the economy.The spending multiplier formula is calculated by dividing 1 by the MPS. It can also be calculated by dividing 1 by 1 minus MPC.The marginal propensity to consume (MPC) is equal to ΔC / ΔY, where ΔC is change in consumption, and ΔY is change in income. If consumption increases by eighty cents for each additional dollar of income, then MPC is equal to 0.8 / 1 = 0.8.