Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400.
-Refer to Scenario 21-2. The multiplier for this economy is
A)6.00.
B)6.25.
C)8.40
D)9.00.

Question

Quizplus · Accepted Answer

The formula for calculating the multiplier is:
Multiplier = 1/(1-MPC)
where MPC is the marginal propensity to consume.
MPC can be calculated by the change in consumption over the change in income:
MPC = (ΔC/ΔY)
In this case, the change in consumption is:
ΔC = $5,536 - $5,200 = $336
The change in income is:
ΔY = $8,400 - $8,000 = $400
Therefore, MPC = $336/$400 = 0.84
Using the formula for the multiplier, we get:
Multiplier = 1/(1-0.84) = 6.25
So, the answer is B.