Which statement about the multiplier is correct?
A)If a $20 billion increase in spending creates $20 billion of new income in the first round of the multiplier process and $15 billion in the second round, the multiplier in the economy is 5.
B)If a $40 billion increase in spending creates $40 billion of new income in the first round of the multiplier process and $20 billion in the second round, the multiplier in the economy is 4.
C)If a $60 billion increase in spending creates $60 billion of new income in the first round of the multiplier process and $50 billion in the second round, the multiplier in the economy is 5.
D)If an $80 billion increase in spending creates $80 billion of new income in the first round of the multiplier process and $60 billion in the second round, the multiplier in the economy is 4.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. In option D, the second round income is 60 billion, which implies an MPC of 0.75 (60/80). The multiplier is 1/(1-0.75) = 4.

Which Statement About the Multiplier Is Correct