The Impact of Government Spending Multiplier on Output

What is the government spending multiplier and how does it affect the total increase in output (GDP)?

Government Spending Multiplier Calculation

The government spending multiplier in this scenario is 5. This means that for every additional dollar of government spending, the total increase in output (GDP) will be five times that amount.

Formula for Multiplier

The government spending multiplier can be calculated using the formula: Multiplier = 1 / (1 - Marginal Propensity to Consume).

Calculating the Multiplier

In this case, the marginal propensity to consume is given as 0.8. Plugging this value into the formula, we get: Multiplier = 1 / (1 - 0.8) = 1 / 0.2 = 5.

Implication of the Multiplier

Therefore, the government spending multiplier in this scenario is 5. This means that for every additional dollar of government spending, the total increase in output (GDP) will be five times that amount.