Suppose the economy has no income taxes or imports. How is the size of the expenditure multiplier related to the marginal propensity to consume? What is the multiplier if the MPC equals 0.25? If the MPC equals 0.50? If the MPC equals 0.90?
What will be an ideal response?
The multiplier equals , so the larger the MPC, the larger the multiplier. If the MPC is 0.25, the multiplier equals = = 1.3. If the MPC is 0.50, the multiplier equals = = 2.0. And if the MPC is 0.90, the multiplier equals = = 10.0. So, the larger the MPC, the larger the multiplier.
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