How is the multiplier computed as___________?
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Answer: D. a or b
Explanation
The spending multiplier can be calculated as one divided by the marginal propensity to save. Equivalently, the multiplier equals one divided by one minus the marginal propensity to consume. These mathematical formulas reflect the round-by-round circulation of income in the economy. Keynesian economics uses the multiplier to measure total output changes from spending shocks. The marginal propensity to consume and save always sum to exactly one. Higher consumer spending propensities result in larger overall spending multipliers.
Fiscal policy makers calculate multipliers to determine required government spending adjustments. Economic stimulus packages rely on multiplier effects to generate broad recovery growth. Leakages like imports and taxes reduce the effective size of real-world multipliers. Option A represents the correct formula utilizing the marginal propensity to consume. Option B represents the correct formula utilizing the marginal propensity to save. Option C incorrectly uses marginal propensity to consume in the denominator.
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