Question

If the marginal propensity to consume is 0.80, then the multiplier is _________.

1) 8
2) 5
3) 2
4) 4

Answer 1

If the marginal propensity to consume is 0.80, then the multiplier is 5. Thus the correct option is 2. 5.

Step-by-step explanation:

The multiplier is determined by the formula
`\( \frac{1}{1 - \text{MPC}} \)`, where MPC represents the marginal propensity to consume. In this case, if the MPC is 0.80, then the multiplier is
`\( (1)/(1 - 0.80) \).`Calculating this, we get
`\( (1)/(0.20) = 5 \).`

The multiplier concept is rooted in the idea that an initial change in spending can lead to a larger overall impact on the economy. A higher MPC indicates that a significant portion of additional income will be spent, stimulating further economic activity. In this scenario, with an MPC of 0.80, it suggests that 80% of any additional income will be spent on consumption.

The multiplier effect is crucial in economic policy and analysis. It helps policymakers understand the broader consequences of changes in spending and income. In this context, a multiplier of 5 implies that an initial injection of, for example, government spending or investment, could lead to a fivefold increase in the overall economic output. This underscores the importance of understanding consumption patterns in gauging the overall impact of economic interventions.

Thus the correct option is 2. 5.