Question

Keynesian model:

1. Define the multiplier

2. Let the marginal propensity to consume = .9; what is the effect of increasing Investment spending by 50?

Answer 1

1) The multiplier is a measure which determines the final change on the aggregate demand such as how much the IS curve shifts to the left or right due to a change in spending.

The multiplier is measured by:

1/(1-MPC)

where MPC is the marginal propensity to consume

it shows that the final change in the output would be much larger than the change in spending amount due to the multiplier effect.

2) MPC 0.9

Investment spending = 50

Multiplier = 1/(1-MPC)

=1/(1-0.9)

=1/0.1

=10

Increasing investment spending by 50 causes the output to increase by: 50*10 = 500