Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. What is the value of the expenditure multiplier?

Question

Quizplus · Accepted Answer

The expenditure multiplier (k) can be calculated using the formula k = 1/(1-MPC*(1-T)), where MPC is the marginal propensity to consume and T is the tax rate.

In this case, T = 20% = 0.2 and MPC = 0.8. 
So, k = 1/(1-0.8*(1-0.2)) 
   = 1/(1-0.8*0.8) 
   = 1/(1-0.64) 
   = 1/0.36 
   = 2.7777... 
   ≈ 2.8

Therefore, the value of the expenditure multiplier is approximately 2.8.

Real GDP Equals $200 Billion, the Government Collects 20% of Any