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Chapter 12: Q. 89 (page 825)

Suppose that, throughout the U.S. economy,

individuals spend 90% of every additional dollar that they earn. Economists would say that an individual鈥檚 marginal propensity to consume is 0.90. For example, if Jane earns an additional dollar, she will spend 0.9112 = \(0.90 of it. The individual that earns \)0.90 (from Jane) will spend 90% of it or $0.81. This process of spending continues and results in an infinite geometric series as follows: 1,0.9,0.92,0.93,.....

The sum of this infinite geometric series is called the

multiplier. What is the multiplier if individuals spend 90%

of every additional dollar that they earn?

Short Answer

Expert verified

The multiplier is 10.

Step by step solution

01

Given information

We are givena=1,r=0.9.an=ran-1

02

Calculate

We use the formula S=a11-r

We have,

S=11-0.9S=10

The multiplier is 10.

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