Consider a simple macro model with demand-determined output and the following specific parameter values:
a) Marginal propensity to consume out of disposable income = 0.6
b) Marginal propensity to consume out of national income = 0.48
c) Marginal propensity to import = 0.23
The simple multiplier without government and foreign trade in this economy is ________ and the simple multiplier with government and foreign trade in this economy is ________.
A) 1.67; 1.33
B) 1.67; 4
C) 2.5; 1.33
D) 2.5; 2.5
E) 2.5; 4

Question

Consider a simple macro model with demand-determined output and the following specific parameter values: 
	a) Marginal propensity to consume out of disposable income = 0.6 
	b) Marginal propensity to consume out of national income = 0.48
	c) Marginal propensity to import = 0.23 
The simple multiplier without government and foreign trade in this economy is ________ and the simple multiplier with government and foreign trade in this economy is ________. 
A) 1.67; 1.33 
B) 1.67; 4 
C) 2.5; 1.33 
D) 2.5; 2.5 
E) 2.5; 4

Quizplus · Accepted Answer

The simple multiplier without government and foreign trade is given by:
1/(1-MPC) = 1/(1-0.48) = 1/0.52 = 1.92

The simple multiplier with government and foreign trade is given by:
1/(1-MPC+MPM) = 1/(1-0.48+0.23) = 1/0.75 = 1.33

Therefore, the answer is C: 2.5 for the simple multiplier without government and foreign trade and 1.33 for the simple multiplier with government and foreign trade.

Consider a Simple Macro Model with Demand-Determined Output and the Following