If a $50 billion decrease in investment spending causes income to decline by $50 billion in the ﬁrst round of the multiplier process and by $25 in the second round, the multiplier in the economy is
A) 2.
B) 3.33.
C) 5.
D) 10.

Question

Quizplus · Accepted Answer

The multiplier is calculated as the total change in income divided by the initial change in spending. Here, the first round change is $50 billion, and the second round change is $25 billion, indicating a marginal propensity to consume (MPC) of 0.5. The multiplier is 1/(1-MPC) = 1/(1-0.5) = 2.

If a $50 Billion Decrease in Investment Spending Causes Income