When Money Is Spent on Goods and Services, Those That $D$

question 6

Multiple Choice

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 $100 c \%$ and saves $100 s \%$ 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, $c + s = 1$ .
The number $k = 1 / s$ is called the multiplier. What is the multiplier if the marginal propensity to consume is $90 \%$ ?
Select the correct answer.

• A) 4
• B) 3
• C) 6
• D) 7
• E) 10