Question

If the marginal propensity to consume is 0.6, the multiplier for government purchases of goods and services will be:

O 0.75.
O 1.25.
O 2.5.
O 4.

Answer 1

The multiplier refers to how many times a dollar will turnover in the economy. It is based on the Marginal Propensity to Consume (MPC).

Step-by-step explanation:

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. If the MPC is 80%, then out of every one dollar received by a consumer, $0.80 will be spent. This $0.80 is received by another person. In turn, 80% of the $0.80 received, or $0.64, will be spent, and so on. The impact of the multiplier is diluted when the effect of taxes and expenditure on imports is considered. To derive the multiplier, you take 1 divided by 1 minus the MPC.