An economy has no imports and no taxes.The marginal propensity to save is 0.2.The multiplier is ________ so a ________ increase in autonomous expenditure increases equilibrium expenditure by $60 billion.

Question

Quizplus · Accepted Answer

The multiplier formula is 1/(1-MPC). 
Given MPC= 0.2, so the multiplier is 1/(1-0.2) = 1.25. 
Equilibrium Expenditure (Y) = Multiplier* Autonomous Expenditure (A). 
We know that an increase in autonomous expenditure by $1 will increase the equilibrium expenditure by multiplier*$1, so an increase in autonomous expenditure by $x will increase equilibrium expenditure by multiplier*$x. 
Given increase in equilibrium expenditure = $60 billion. 
So, $60 billion = 1.25*x 
Therefore, x = $48 billion. So, the correct option is B.

An Economy Has No Imports and No Taxes