Question

If the Marginal Propensity to Consume (c) is 0.8, the government expenditure multiplier equals:

Options

• 2.5

• −4

• 4

• 5

Answer 1

The government expenditure multiplier is \[\frac{1}{1-c} = \frac{1}{1-0.8} = \frac{1}{0.2} = 5\]. This is larger in magnitude than the tax multiplier, which is \[\frac{-0.8}{0.2} = -4\].