If leakages out of the circular flow are 40 percent of additional income, the size of the multiplier effect is 2.5.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1 - marginal propensity to consume), where the marginal propensity to consume is the complement of the leakage rate. If leakages are 40% (0.4), then the marginal propensity to consume is 60% (0.6), and the multiplier is 1/(1-0.6) = 2.5.

If Leakages Out of the Circular Flow Are 40 Percent