The government-purchases multiplier is defined as
A)MPC.
B)1 - MPC.
C)1/MPC.
D)1/(1 - MPC).

Question

Quizplus · Accepted Answer

The government-purchases multiplier measures the change in aggregate demand resulting from an increase in government expenditures. It is calculated as 1/(1 - MPC), where MPC is the marginal propensity to consume. This is because an increase in government spending leads to an increase in disposable income, and as a result, consumption also increases by MPC. The overall effect on aggregate demand is amplified by the multiplier, which is equal to 1/(1 - MPC). Therefore, choice D (1/(1 - MPC)) is the correct answer.

The Government-Purchases Multiplier Is Defined as