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Understanding the Answer
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Answer
The marginal propensity to consume (MPC) tells us how much people will spend out of an additional dollar they receive. If the MPC is 0. 8, it means that for every extra dollar earned, people will spend 80 cents and save 20 cents. To find the spending multiplier effect, we use the formula 1 divided by (1 - MPC). In this case, it would be 1 divided by (1 - 0.
Detailed Explanation
The spending multiplier is found by using the formula 1 divided by (1 - MPC). Other options are incorrect because This answer suggests a smaller effect; This answer is too high for the given MPC.
Key Concepts
multiplier effect
marginal propensity to consume
Topic
Spending and Tax Multipliers
Difficulty
medium level question
Cognitive Level
understand
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