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Suppose we know the multiplier of a country is 4. Assume that only consumption and investment spendings depend on the output level, the amount of taxation is exogenous, and the investment behaviour equation is known to be I = 2,000 + 0.1 Y. The marginal propensity to consume in this country is then __ Group of answer choices0.5uncertain from the information given0.750.65

Question

Suppose we know the multiplier of a country is 4. Assume that only consumption and investment spendings depend on the output level, the amount of taxation is exogenous, and the investment behaviour equation is known to be I = 2,000 + 0.1 Y. The marginal propensity to consume in this country is then __ Group of answer choices0.5uncertain from the information given0.750.65

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Solution

The multiplier (k) is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Given that the multiplier is 4, we can set up the equation as follows:

4 = 1/(1-MPC)

Solving for MPC, we get:

1-MPC = 1/4

MPC = 1 - 1/4

MPC = 0.75

So, the marginal propensity to consume in this country is 0.75.

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