00:01
To explain the multiplier with an 80 % marginal propensity to consume, let's simplify the economy.
00:06
Let's just give ourselves a two -person economy, person a, and person b.
00:11
Now let's suppose that person a starts with $1 ,000 in their pocket.
00:16
Now because they have that 80 % marginal propensity to consume or otherwise 0 .8, this means that they're going to spend 80 % of that $1 ,000.
00:26
So 80 % of that $1 ,000 then going to person b is, 1 ,000 times 0 .8, which means person b is then going to get $800.
00:38
Well, now person b also has a marginal propensity to consume of 80%.
00:43
So they're now going to spend that 80 % of their $800 is going to go back to person a.
00:50
So 800 times 0 .8 gives us $640 to person a.
00:58
And the process continues...