When Money Is Spent on Goods and Services, Those That

question 73

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 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, . The number k = 1/s is called the multiplier. What is the multiplier if the marginal propensity to consume is ?

• A)3
• B)6
• C)2.5
• D)7

---

Definitions:

Calculated

Determined or deduced by mathematical methods.

Annual Return

The percentage gain or loss on an investment over a one-year period, including dividends and capital gains.

Vincent Van Gogh

A Dutch post-impressionist painter known for his influence on the history of Western art with his vivid paintings.

Investment

Investment refers to the act of allocating resources, usually money, with the expectation of generating an income or profit.