If the marginal propensity to consume is 0.85 and there are no imports or income taxes,the expenditure multiplier is equal to
A)1 - 0.85 = 0.15.
B)0.85 × the change in autonomous expenditure.
C)1 ÷ (1 - 0.85)= 1 ÷ 0.15 = 1.45.
D)1 ÷ 0.85 = 1.176.
E)0.85 ÷ 1 = 0.85.

Question

Quizplus · Accepted Answer

The expenditure multiplier is calculated as 1/(1-MPC) where MPC is the marginal propensity to consume. In this case, MPC is 0.85, so the expenditure multiplier is 1/(1-0.85) = 1/0.15 = 6.67. Therefore, the correct answer is C, 1 ÷ (1-0.85) = 1 ÷ 0.15 = 6.67.

If the Marginal Propensity to Consume Is 0