An economy has no imports and no taxes. The marginal propensity to save is 0.2. The multiplier is
___________ so a___________ increase in autonomous expenditure increases equilibrium expenditure by
$60 billion.

Question

An economy has no imports and no taxes. The marginal propensity to save is 0.2. The multiplier is
___________ so a___________  increase in autonomous expenditure increases equilibrium expenditure by
$60 billion.

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Since MPS (marginal propensity to save) is 0.2, MPC is 0.8. Thus, the multiplier is 1/(1-0.8) = 5. Therefore, a $12 billion increase in autonomous expenditure increases equilibrium expenditure by 5 * $12 billion = $60 billion.

An Economy Has No Imports and No Taxes