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 ÷ 0.85 = 1.176.
D) 1 ÷ (1 - 0.85) = 1 ÷ 0.15 = 1.45.
E) 0.85 ÷ 1 = 0.85.

Question

Quizplus · Accepted Answer

The expenditure multiplier formula is:

Multiplier = 1 / (1 - Marginal Propensity to Consume)

Substituting the given value, we get:

Multiplier = 1 / (1 - 0.85)

Multiplier = 1 / 0.15

Multiplier = 6.67

Therefore, the expenditure multiplier is 6.67 or 1 / (1 - 0.85), which corresponds to answer choice D.

If the Marginal Propensity to Consume Is 0