ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The greater the MPC (the smaller the MPS), the greater the multiplier. MPS = 0, multiplier = infinity; MPS = . 4, multiplier = 2.5; MPS = . 6, multiplier = 1.67; MPS = 1, multiplier = 1.

Detailed explanation-2: -One small change in the government’s activities will create a big change in the overall economy. The spending multiplier formula is calculated by dividing 1 by the MPS. It can also be calculated by dividing 1 by 1 minus MPC.

Detailed explanation-3: -The expenditure and tax multipliers depend on how much people spend out of an additional dollar of income, which is called the marginal propensity to consume (MPC).

Detailed explanation-4: -The Spending Multiplier can be calculated from the MPC or the MPS. Multiplier = 1/1-MPC or 1/MPS