Question

Suppose that in an economy with no taxation and no external trade, the marginal propensity to consume is 0.7 . The size of the multiplier (rounded to 2 decimal places) will be?

O 0.14
O 3.33
O 7
O 0.33

Answer 1

The size of the economic multiplier in an economy where the marginal propensity to consume is 0.7 would be approximately 3.33. The correct answer is O 3.33.

Step-by-step explanation:

The question revolves around the concept of the economic multiplier, which is influenced by the marginal propensity to consume (MPC). To find the size of the multiplier, we use the formula 1 / (1 - MPC).

Given that the MPC in this scenario is 0.7, the calculation for the multiplier would be 1 / (1 - 0.7) = 1 / 0.3 = approximately 3.33, rounded to two decimal places. Therefore, the size of the multiplier in this economy would be 3.33. The multiplier refers to how many times a dollar will turnover in the economy.

It is based on the Marginal Propensity to Consume (MPC) which tells how much of every dollar received will be spent. In this case, the MPC is 0.7, meaning that out of every dollar received, $0.70 will be spent.

To calculate the size of the multiplier, we can use the formula: 1 / (1 - MPC). So, the multiplier will be 1 / (1 - 0.7) = 1 / 0.3 = 3.33 (rounded to 2 decimal places).