(Advanced analysis) Assume the consumption schedule for a private closed economy is C = 40 + 0.75Y, where C is consumption and Y is gross domestic product. The multiplier for this economy is
A) 3.
B) 4.
C) 5.
D) 10.

Question

Quizplus · Accepted Answer

The multiplier (k) is calculated as 1/(1 - MPC), where MPC (marginal propensity to consume) is the change in consumption (C) divided by the change in income (Y). From the given consumption function C = 40 + 0.75Y, MPC = 0.75. Therefore, the multiplier k = 1/(1 - 0.75) = 1/0.25 = 4.

(Advanced Analysis) Assume the Consumption Schedule for a Private Closed