Assuming no government or foreign sector, the formula for the multiplier is
A) 1/MPC.
B) 1/MPS.
C) 1/(1 + MPC).
D) 1 - MPC.

Question

Quizplus · Accepted Answer

The formula for the multiplier in a closed economy with no government or foreign sector is 1/MPS (where MPS = marginal propensity to save). This is because, in the absence of government or foreign sector, any increase in income is either spent or saved, and the total change in income is the sum of the initial change in spending and subsequent rounds of spending by others who receive the increased income. Therefore, the multiplier effect depends on the marginal propensity to save, which is the proportion of income that is saved rather than spent.

Assuming No Government or Foreign Sector, the Formula for the Multiplier