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). Since the MPC is 0.2, the multiplier is 1/(1-0.2) = 1.25. Thus, a $15 billion increase in autonomous expenditure (which is calculated as 60/1.25) increases equilibrium expenditure by $60 billion. Therefore, the correct choice is B, where a $12 billion increase in autonomous expenditure (which is less than $15 billion) is expected to increase equilibrium expenditure by $60 billion.

An Economy Has No Imports and No Taxes