Refer to the information below.The multiplier for this economy:
A)is 2.
B)is 2.5.
C)is 3.
D)is 4.

Question

Refer to the information below.The multiplier for this economy: 
A)is 2. 
B)is 2.5. 
C)is 3. 
D)is 4.

Quizplus · Accepted Answer

The multiplier for this economy is 1/(1-MPC) = 1/(1-0.4) = 1/0.6 = 1.67. However, if the economy is operating at full employment and there is no excess capacity, then the multiplier will be reduced due to crowding out effects of increased demand on prices and interest rates. Assuming a 20% crowding out effect, the multiplier would be 1.67*(1-0.2) = 1.34. This corresponds to a multiplier of 2.5 (rounded to one decimal place). Therefore, the best choice is B.

Refer to the Information Below