If the MPC equals 0.75 and the proportional income tax rate is 0.2, the spending multiplier equals
A)3
B)2.5
C)16/13
D)1
E)4

Name: If the MPC equals 0.75 and the proportional income tax rate is 0.2, the spending multiplier equals A)3 B)2.5 C)16/13 D)1 E)4
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Question

Quizplus · Accepted Answer

The spending multiplier formula is 1/ (1 - MPC(1 - t)). 
Substituting MPC = 0.75 and t = 0.2, we get: 
Multiplier = 1/ (1- 0.75(1-0.2)) = 1/(1-0.15) = 1/0.85 = 2.5.
Therefore, the correct choice is B.

If the MPC Equals 0