Question

Assume the MPC is 0.6 and lump sum taxes are collected by the government. The government expenditure

multiplier is _____.

Answer 1

The government expenditure multiplier is 2.5.

Step-by-step explanation:

The government expenditure multiplier can be calculated using the formula: 1 / (1 - MPC). The Marginal Propensity to Consume (MPC) represents the proportion of additional income that is consumed. In this case, the MPC is given as 0.6. Therefore, the government expenditure multiplier would be:

1 / (1 - 0.6) = 1 / 0.4 = 2.5

So, the government expenditure multiplier is 2.5.