Question

If the marginal propensity to consume in a municipality is 0.8, what is the value of the simple multiplier? If a new stadium that adds $30 million in new consumption expenditures is built, what is the impact on the economy based on this multiplier? Suppose the marginal propensity to import is 0.3, what happens to the multiplier and to the impact on the economy?

Answer 1

(a) 5

(b) $150 million

(c) 45 million

Step-by-step explanation:

(a) Multiplier = 1 ÷ (1 - MPC )

= 1 ÷ (1 - 0.8 )

= 1 ÷ 0.2

= 5 ⇒ the value of the simple multiplier is 5.

b) If the autonomous expenditure is increased by $30 million then the total output will increase by:

= $30 million × 5

= $150 million

c) If the Marginal propensity to import is 0.3 then the import will increase by:

= 150 × 0.3

= 45 million