Question

With mpc = 0.5, the value of the multiplier implied by the formula \[\Delta Y=\frac{\Delta A}{1-mpc}\] is:

Options

• 2

• 5

• 1

• 0.5

Answer 1

The multiplier is \[\frac{1}{1-mpc}\]. With mpc = 0.5, it equals \[\frac{1}{1-0.5}=2\]. Hence the 75 fall in consumption expenditure produces a total income fall of 75 × 2 = 150.