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 __
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 __
Solution
The multiplier (k) is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, we know that the multiplier is 4.
So, we have the equation 4 = 1/(1-MPC).
To solve for MPC, we first take the reciprocal of both sides to get 1/4 = 1-MPC.
Then, we subtract 1 from both sides to get -3/4 = -MPC.
Finally, we multiply both sides by -1 to get MPC = 3/4 or 0.75.
Therefore, the marginal propensity to consume in this country is 0.75.
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