If the multiplier is 2 and the investment function is: I=200. What is the value of the marginal propensity to consume?
Question
If the multiplier is 2 and the investment function is: I=200. What is the value of the marginal propensity to consume?
Solution
The marginal propensity to consume (MPC) can be calculated using the formula for the multiplier, which is 1/(1-MPC). Given that the multiplier is 2, we can set up the equation as follows:
2 = 1/(1-MPC)
To solve for MPC, we first subtract 1 from both sides:
2 - 1 = 1/(1-MPC) - 1
This simplifies to:
1 = 1/(1-MPC) - 1
Next, we add 1 to both sides:
1 + 1 = 1/(1-MPC)
This simplifies to:
2 = 1/(1-MPC)
To solve for (1-MPC), we take the reciprocal of both sides:
1/2 = 1-MPC
This simplifies to:
0.5 = 1-MPC
Finally, to solve for MPC, we subtract 0.5 from 1:
MPC = 1 - 0.5
So, the marginal propensity to consume (MPC) is 0.5.
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