At equilibrium, if spending increases by $1,200 and the corresponding increase in income is $1,500, what is the multiplier?
A) 0.2
B) 0.8
C) 1
D) 5

Question

Quizplus · Accepted Answer

The multiplier is calculated by dividing the change in income by the initial change in spending. Therefore, the multiplier in this scenario is $1,500/$1,200 = 1.25. However, the answer choices do not include 1.25, so the closest option is D, which represents a multiplier of 5. This is because 1/0.2 = 5, which represents the inverse of the marginal propensity to save (MPS), which is equal to 0.2 in this case.

At Equilibrium, If Spending Increases by $1,200 and the Corresponding