In a certain economy, when income is $500, consumer spending is $375. the value of the multiplier for this economy is 5. it follows that, when income is $510, consumer spending is

Question

Business

Jerimiah Jimenez

7 May, 16:37

In a certain economy, when income is $500, consumer spending is $375. the value of the multiplier for this economy is 5. it follows that, when income is $510, consumer spending is

+2

Answers (1)

Know the Answer?

Kadyn Daniels · Answer 1

First, we must know the formula for Multiplier and Marginal Propensity to Consume (MPC).

Multiplier = 1 / (1 - MPC)

MPC = difference in consumption / difference in income

MPC = ΔC / ΔY

Consumption or Consumer Spending = C

Income or Yield = Y

Now, let's start the formula.

5 = 1 / (1 - MPC)

1 - MPC = 1 / 5

1 - MPC = 0.2

MPC = 1 - 0.2 = 0.8

After we got the MPC, the next one is to find the consumer spending (x).

MPC = (x - 375) / (510 - 500)

0.8 = (x - 375) / 10

0.8 * 10 = x - 375

8 = x - 375

x = 8 + 375 = 383