In an economy with no income taxes or imports, if the expenditure multiplier is 5, what does the MPC equal?
A) 0.5
B) 0.4
C) 0.8
D) 0.2
E) 0.9

Question

Quizplus · Accepted Answer

The expenditure multiplier equation is:

expenditure multiplier = 1 / (1 - MPC)

If the expenditure multiplier is 5, we can plug that in and solve for the MPC:

5 = 1 / (1 - MPC)
5(1 - MPC) = 1
5 - 5MPC = 1
4 = 5MPC
MPC = 4/5 = 0.8

Therefore, the MPC equals 0.8. The correct answer is (C).

In an Economy with No Income Taxes or Imports, If