(Advanced analysis) Assume the saving schedule for a private closed economy is S = −20 + 0.2Y, where S is saving 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 saving function shows that saving depends positively on income, with a slope of 0.2. The multiplier for this economy can be found by using the formula: 
Multiplier = 1 / (1 - MPC), 
where MPC (marginal propensity to consume) is the fraction of each additional dollar of income that is spent rather than saved. In this case, MPC = 1 - 0.2 = 0.8. 
Therefore, the multiplier is: 
Multiplier = 1 / (1 - 0.8) = 5. 
This means that a $1 increase in autonomous spending (such as government expenditure or investment) would lead to a $5 increase in GDP in this economy.

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