In a simple macro model where the marginal propensity to consume out of disposable income is 0.8,the net tax rate is 0.25,and the marginal propensity to import is 0.12,the simple multiplier will be
A)0.480.
B)1.471.
C)1.923.
D)2.083.
E)2.110.

Question

Quizplus · Accepted Answer

The simple multiplier is calculated using the formula 1/(1 - MPC(1 - tax rate) + MPM), where MPC is the marginal propensity to consume, MPM is the marginal propensity to import, and the tax rate is the net tax rate. Plugging in the values given: 1/(1 - 0.8(1 - 0.25) + 0.12) = 1/(1 - 0.8*0.75 + 0.12) = 1/(1 - 0.6 + 0.12) = 1/0.52 = 1.923.

In a Simple Macro Model Where the Marginal Propensity to Consume