In a simple, closed economy (no government or foreign sector), if disposable income increases by $1,000 and consumption increases by $600, the multiplier is:

Question

Quizplus · Accepted Answer

The multiplier in a simple closed economy is equal to the change in GDP divided by the change in autonomous spending. In this case, since there is no government or foreign sector, autonomous spending is equal to consumption. Thus, the multiplier is:
change in GDP / change in consumption = $1,000 / $600 = 1.67
However, the question is asking for the reciprocal of the multiplier, since it is based on the change in consumption rather than the change in autonomous spending. Therefore, the answer is:
1 / 1.67 = 0.60 or 2/3
Rounded to one decimal place, the answer is 0.6.

In a Simple, Closed Economy (No Government or Foreign Sector)