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Suppose that a simple economy has a multiplier of 2. The investment function is I=40.What is the marginal propensity to consume?

Question

Suppose that a simple economy has a multiplier of 2. The investment function is I=40.What is the marginal propensity to consume?

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Solution

The marginal propensity to consume (MPC) can be calculated using the formula:

MPC = 1 - (1/Multiplier)

Given that the multiplier is 2, we can substitute this into the formula:

MPC = 1 - (1/2) = 0.5

So, the marginal propensity to consume in this economy is 0.5.

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