Calculate the government purchases multiplier if the marginal propensity to consume equals 0.75, the tax rate is 0.2, and the marginal propensity to import equals 0.3.

Question

Quizplus · Accepted Answer

The government purchases multiplier can be calculated using the formula 1/(1 - MPC(1 - tax rate) + MPM), where MPC is the marginal propensity to consume, MPM is the marginal propensity to import, and the tax rate is the proportion of income that is taxed. Plugging in the given values: 1/(1 - 0.75(1 - 0.2) + 0.3) = 1/(1 - 0.75*0.8 + 0.3) = 1/(1 - 0.6 + 0.3) = 1/0.7 = 1.43.

Calculate the Government Purchases Multiplier If the Marginal Propensity to Consume