The formulas to calculate the spending multiplier are:
\[ SM = \frac{1}{1 - MPC} \]
or
\[ SM = \frac{1}{MPS} \]
Where:
A spending multiplier is defined as the inverse of a person's marginal propensity to save. It measures the effect of a change in spending on the overall economy.
Let's assume the following values:
Using the formulas to calculate the spending multiplier:
\[ SM = \frac{1}{1 - 0.8} = 5 \]
or
\[ SM = \frac{1}{0.2} = 5 \]
The spending multiplier is 5.