Suppose the price level is constant, output is demand- determined, and the economy is closed with no government. If the saving function is S = - 100 + (0.2)Y, the simple multiplier is
A)0.2.
B)1.
C)2.5.
D)5.
E)- insufficient information to know.

Question

Quizplus · Accepted Answer

The simple multiplier is calculated as 1/(1-MPC), where MPC (marginal propensity to consume) is 1 minus the marginal propensity to save (MPS). Given the saving function S = -100 + 0.2Y, MPS is 0.2, so MPC is 0.8. Therefore, the multiplier is 1/(1-0.8) = 5.

Suppose the Price Level Is Constant, Output Is Demand- Determined