Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then 1 + MPC + MPC² + MPC³ = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of A)1.96. B)3. C)1.67. D)2.5.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC), so with an MPC of 0.6, the multiplier is 1/(1-0.6) = 2.5. This is because the formula for the multiplier in Keynesian economics is based on the marginal propensity to consume, indicating how much additional economic activity is generated from an additional unit of spending.

Suppose an Economy's Marginal Propensity to Consume (MPC) Is 0