FIGURE 23-5
-Refer to Figure 23-5.Suppose that an increase in government purchases by 50 causes the AD curve to shift to the right,as shown.The simple multiplier is ________ and the multiplier is ________.
A)6; 1.2
B)2.8; 1.2
C)4; 1.2
D)4; 2.8
E)4; 3.2

Question

FIGURE 23-5
-Refer to Figure 23-5.Suppose that an increase in government purchases by 50 causes the AD curve to shift to the right,as shown.The simple multiplier is ________ and the multiplier is ________.
A)6; 1.2 
B)2.8; 1.2 
C)4; 1.2 
D)4; 2.8 
E)4; 3.2

Quizplus · Accepted Answer

The simple multiplier can be calculated as 1/(1-MPC) where MPC is the marginal propensity to consume. From the graph, we can estimate that the MPC is approximately 0.75 (change in real GDP/change in disposable income). Therefore, the simple multiplier is 1/(1-0.75) = 4. The multiplier is equal to the reciprocal of the (1-MPC) and is thus equal to 1/0.25 = 4.

FIGURE 23-5 -Refer to Figure 23-5.Suppose That an Increase in Government Purchases