The Impact of Government Spending Multiplier on Output
What is the government spending multiplier and how does it affect the total increase in output (GDP)?
Government Spending Multiplier Calculation
The government spending multiplier in this scenario is 5. This means that for every additional dollar of government spending, the total increase in output (GDP) will be five times that amount.
Formula for Multiplier
The government spending multiplier can be calculated using the formula: Multiplier = 1 / (1 - Marginal Propensity to Consume).
Calculating the Multiplier
In this case, the marginal propensity to consume is given as 0.8. Plugging this value into the formula, we get: Multiplier = 1 / (1 - 0.8) = 1 / 0.2 = 5.
Implication of the Multiplier
Therefore, the government spending multiplier in this scenario is 5. This means that for every additional dollar of government spending, the total increase in output (GDP) will be five times that amount.