C = 26 + 0.75Y
Ig = 60
X = 24
M = A
(Advanced analysis) The equations give information for a private open economy. The letters Y, C, Ig, X,
And M stand for GDP, consumption, gross investment, exports, and imports, respectively. Figures are in
Billions of dollars. The multiplier for the economy is
A) 4.6.
B) 3.33.
C) 5.0.
D) 4.0.

Question

C = 26 + 0.75Y 
Ig = 60
X = 24
M = A
(Advanced analysis) The equations give information for a private open economy. The letters Y, C, Ig, X,
And M stand for GDP, consumption, gross investment, exports, and imports, respectively. Figures are in
Billions of dollars. The multiplier for the economy is
A) 4.6.
B) 3.33.
C) 5.0.
D) 4.0.

Quizplus · Accepted Answer

The multiplier is calculated using the formula 1/(1 - MPC), where MPC (marginal propensity to consume) is the change in consumption (C) for a change in income (Y). From the given consumption function C = 26 + 0.75Y, MPC is 0.75. Therefore, the multiplier = 1/(1 - 0.75) = 1/0.25 = 4.