Question

If the MPC is 0.8, the value of the investment multiplier is:

Options

• 0.2

• 8

• 1.25

• 5

Answer 1

\[K=\frac{1}{1-c}=\frac{1}{1-0.8}=\frac{1}{0.2}=5\]. Equivalently, with \[s = 1 - 0.8 = 0.2\], \[K=\frac{1}{s}=5\]. Thus every unit of autonomous expenditure ultimately raises equilibrium income by 5 units.