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 0.2, what happens to the multiplier and to the impact on the economy?

Answer 1

5; $150 Million

1.25; $37.5 Million

Step-by-step explanation:

Multipliers are generally used to show the effects of an additional job opportunity, service, goods or a sum of money on the economy. In this specific problem, we have:

(a) The simple multiplier = 1/(1-0.8) = 1/0.2 = 5. Then, the impact on the economy is approximately = $30 x 5 = $150 Million.

(b) The simple multiplier becomes: 1/(1-0.2) = 1/(0.8) = 1.25. Then, the impact on the economy changes to = $30 x 1.25 = $37.5 Million.