If leakages out of the circular flow are 25 percent of additional income, what is the size of the multiplier effect?

Name: If leakages out of the circular flow are 25 percent of additional income, what is the size of the multiplier effect?
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Quizplus · Accepted Answer

The size of the multiplier effect is calculated as 1/(1 - marginal propensity to consume) or 1/marginal propensity to save. If leakages are 25 percent of additional income, this means the marginal propensity to save is 0.25. Therefore, the multiplier is 1/0.25 = 4.

If Leakages Out of the Circular Flow Are 25 Percent