Suppose the government increases education spending by $20 billion. If the marginal propensity to consume is 0.85, how much will total spending increase?

The answer is $134billion

Explanation:

Initial increase in spending = $20billion

Marginal propensity to consume = 0.85

To calculate increase in spending, we use the formula for multiplier

K = 1 / 1 - MPC

K = 1 / 1 - 0.85

K = 1/ 0.15

K = 6.66

K = 6.7 approximately

To calculate how much the spending increase

We use the formula

K = change in national income / change in government spending

6.7 = change in national income / $20 billion

We cross multiply

Change in national income = 6.7 × $20billion

Change in national income = 134billion

Therefore the total spending increase by $134billion

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