Suppose that, throughout the U.S. economy, individuals

Chapter 12, Problem 89

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Suppose that, throughout the U.S. economy, individuals spend 90% of every additional dollar that they earn. Economists would say that an individuals marginal propensity to consume is 0.90. For example, if Jane earns an additional dollar, she will spend 0.9112 = $0.90 of it. The individual that earns $0.90 (from Jane) will spend 90% of it or $0.81. This process of spending continues and results in an infinite geometric series as follows: 1, 0.90, 0.902 , 0.903 , 0.904 , p The sum of this infinite geometric series is called the multiplier. What is the multiplier if individuals spend 90% of every additional dollar that they earn?

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