Use the table below to answer the following questions.
Table 11.3.1
The following table shows the relationship between aggregate planned expenditure and real GDP in the hypothetical economy of Econoworld.

-Refer to Table 11.3.1.The multiplier
A)is 5.
B)is 1.8.
C)is 4.
D)is 2.5.
E)cannot be determined without more information.

Question

Use the table below to answer the following questions.
Table 11.3.1
The following table shows the relationship between aggregate planned expenditure and real GDP in the hypothetical economy of Econoworld.
 
-Refer to Table 11.3.1.The multiplier
A)is 5. 
B)is 1.8. 
C)is 4. 
D)is 2.5. 
E)cannot be determined without more information.

Quizplus · Accepted Answer

The multiplier is 5 because the marginal propensity to consume (MPC) is 0.8, which means that for every $1 increase in income, $0.8 is spent on consumption. This means that the multiplier is 1/(1-MPC) = 1/(1-0.8) = 5.

Use the Table Below to Answer the Following Questions