Suppose an economy's marginal propensity to consume MPC) is 0.6. Then
A) 1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 1.96.
B) 1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3.
C) 1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3.
D) 1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 2.5.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC). With an MPC of 0.6, the multiplier is 1/(1-0.6) = 2.5. The series 1 + MPC + MPC^2 + MPC^3 = 2.176, and as more terms are added, it approaches the multiplier value of 2.5.

Suppose an Economy's Marginal Propensity to Consume MPC) Is 0