Basic explanation of how the multiplier concept is computed, including MPC.
Assume that the average American's marginal propensity to consume (MPC) is 2/5, and American producers' MPC is also 2/5.
Calculate the following, explaining how you arrived at each result:
The amount consumers will spend on new consumption
The amount of new spending from producers
The multiplier in this case
The total increase in spending from the primary spending of $400 million
Elucidate the multiplier concept as it applies in this case.
What are the qualifications and limitations of the multiplier model?