When Money Is Spent on Goods and Services, Those That $100 c \%$

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 $60 \%$ ?

A) 3
B) 6
C) 2.5
D) 7
E) 4

Correct Answer:

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