AP Economics Question

Discus: SAT/ACT Tests and Test Preparation: April 2004 Archive: AP Economics Question
 By Whtx (Whtx) on Monday, April 05, 2004 - 08:24 pm: Edit

I am a little confused about the multiplier effect. If some business spends \$3 Million dollars, the multiplier is 3 then the total spending would be \$9 Million. However, this doesnt make sense.

Lets assume the total amount of money in circulation is the 3 million... To me, it seems like its just "double counting." Can someone clear me up?

 By Whtx (Whtx) on Monday, April 05, 2004 - 11:19 pm: Edit

?

 By Ofishstix (Ofishstix) on Tuesday, April 06, 2004 - 05:25 pm: Edit

thatd make the MPS=.333, which means then MPC=.667...
i understand this more with a little calculus stuff...but basically, if i spend 3 million dollars...the person who gets my money will save 1/3 of it and spend 2/3, or 2 million dollars...the same thing will happen, but this time, 1.333 million gets spent...and this is basically the sum of a geometric series...1/(1-MPC)=1/(MPS...b/c 3 million + 2 million + 1.333 million + .866667 million + ... done infinity times, eventuall approaches 9 million dollars