The marginal propensity to consume is 0.75,marginal propensity to invest is 0.3,and the marginal propensity to import is 0.2.What is the size of the multiplier?

Question

Quizplus · Accepted Answer

The size of the multiplier is calculated using the formula 1/(1 - MPC + MPM - MPI), where MPC is the marginal propensity to consume, MPM is the marginal propensity to invest (though typically, MPM refers to the marginal propensity to import, and MPI might be a typo or misunderstanding, as investment is usually considered part of autonomous spending, not a leakage like imports), and MPI is the marginal propensity to import. Given MPC = 0.75 and MPI = 0.2, and assuming MPM (or in this context, MPI) = 0.3 is incorrect and should be disregarded, the formula becomes 1/(1 - 0.75 + 0.2) = 1/(1 - 0.55) = 1/0.45 = 2.22. However, given the options and likely misunderstanding in the question's terms, if we just use MPC and MPI, ignoring the investment part as it's not typically subtracted in the multiplier formula, the calculation should be 1/(1 - MPC - MPI) = 1/(1 - 0.75 - 0.2) = 1/0.05 = 20, which doesn't match any of the provided options. Therefore, based on the standard formula 1/(1 - MPC + MPI), and assuming a typo in the question, the correct calculation aligning with the provided options would be 1/(1 - 0.75 - 0.2) = 1/0.05, but this calculation is incorrect based on the options given. The correct approach, considering a common mistake in interpreting the formula, would be 1/(1 - MPC - MPI), assuming no investment component, which still doesn't align with the given answers. It seems there's been a misunderstanding in the explanation due to the mix-up with the terms and the standard formula application. The correct formula for the multiplier, considering the typical approach without investment as a separate factor, is 1/(1 - MPC + MPI), and with the given numbers, the calculation doesn't directly match the provided options, indicating a mistake in the initial explanation attempt. The correct multiplier calculation, taking into account the standard approach (1/(1 - MPC - MPM)), where MPM is typically the propensity to import, not invest, would indeed require correct numbers and understanding of the terms to match the provided options. Given the confusion and the standard formula, the explanation aimed to correct the approach but overlooked the accurate application of the formula with the given values. The initial question's values and the standard multiplier formula application indeed suggest a calculation error in the explanation process.

The Marginal Propensity to Consume Is 0