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When money is spent on goods and services, those that receive the money also spend some of it. The...

When money is spent on goods and services, those that receive the money also spend some of it. The people receiving some of the twice-spent money will spend some of that, and so on. Economists call this chain reaction the multiplier effect. In a hypothetical isolated community, the local government begins the process by spending D dollars. Suppose that each recipient of spent money spends and saves of the money that he or she receives. The values c and s are called the marginal propensity to consume and the marginal propensity to save and, of course, c + s = 1.

(a) Let Sn be the total spending that has been generated after n transactions. Find an equation for Sn.

(b) Show that limn→∞ S= kD, where k = 1/s. The number k is called the multiplier. What is the multiplier if the marginal propensity to consume is 80%?

Apr 24 2020 View more View Less

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