If the value of the multiplier in a closed economy with no government sector is equal to 5, then which of the following is true?
A) The level of output of goods and services in the economy will equal 100.
B) The marginal propensity to consume in the economy will be equal to 0.4.
C) The level of investment in the economy will be equal to 400.
D) The marginal propensity to save in the economy will be equal to 0.2.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. If the multiplier is 5, then 1/(1-MPC) = 5, which means 1-MPC = 0.2. Therefore, the marginal propensity to save (MPS) is 0.2.

If the Value of the Multiplier in a Closed Economy