An economy has no imports and no taxes. The marginal propensity to save is 0.2. The multiplier is ________ so a ________ increase in autonomous expenditure increases equilibrium expenditure by $60 billion.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1 - MPC) or 1/MPS. Given the marginal propensity to save (MPS) is 0.2, the multiplier is 1/0.2 = 5. A $12 billion increase in autonomous expenditure, multiplied by the multiplier of 5, results in a $60 billion increase in equilibrium expenditure.

An Economy Has No Imports and No Taxes