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

Question

Quizplus · Accepted Answer

The government purchases multiplier is calculated as 1/(1 - MPC), where MPC is the marginal propensity to consume. This is because an increase in government purchases will increase income, which will in turn increase consumption. The MPC represents the fraction of additional income that is consumed, so the multiplier is the inverse of the fraction that is not consumed. Therefore, the correct answer is B, which is 1/(1 - MPC).

The Government Purchases Multiplier Is Defined as