What is the government purchases multiplier if the tax rate is 0.2 and the marginal propensity to consume is 0.8? Assume the economy is closed.

Question

Quizplus · Accepted Answer

The government purchases multiplier can be calculated using the formula 1 / (1 - MPC * (1 - tax rate)). Plugging in the values given (MPC = 0.8, tax rate = 0.2), we get 1 / (1 - 0.8 * (1 - 0.2)) = 1 / (1 - 0.8 * 0.8) = 1 / (1 - 0.64) = 1 / 0.36 = 2.78.

What Is the Government Purchases Multiplier If the Tax Rate