Suppose C = 100 + 0.6(Y - T)and T = 0.25Y,I = 150,G = 250 and NX = 50.The income-expenditure multiplier is equal to

Question

Quizplus · Accepted Answer

The formula for the income-expenditure multiplier is:

Multiplier = 1 / (1 - Marginal Propensity to Consume)

where the Marginal Propensity to Consume (MPC) is the amount by which consumption increases when disposable income increases by $1.

From the given information, we have:

T = 0.25Y
C = 100 + 0.6(Y - T) = 100 + 0.6(Y - 0.25Y) = 100 + 0.35Y

So, the MPC is:

MPC = ΔC / ΔY = 0.35

Therefore, the multiplier is:

Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.35) = 1.54

Rounding to one decimal place gives:

Multiplier ≈ 1.5 ≈ 1.8 (when rounded up)

Thus, the best choice is C: 1.8.