Question

The government spending multiplier, i.e., \[\frac{\Delta Y}{\Delta G}\], is equal to:

Options

• \[\frac{1}{1+c}\]

• \[\frac{1}{c}\]

• \[\frac{c}{1-c}\]

• \[\frac{1}{1-c}\]

Answer 1

A change in government spending leads to a multiplied change in equilibrium income: \[\Delta Y=\frac{1}{1-c}\Delta G\], so the multiplier \[\frac{\Delta Y}{\Delta G}=\frac{1}{1-c}\], where c is the marginal propensity to consume.