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 choices0.750.5uncertain from the information given0.65
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 choices0.750.5uncertain from the information given0.65
Solution
The multiplier (k) of a country is calculated using the formula:
k = 1 / (1 - MPC)
where MPC is the marginal propensity to consume.
Given that the multiplier (k) is 4, we can substitute this into the formula and solve for MPC:
4 = 1 / (1 - MPC)
Rearranging the equation to solve for MPC gives:
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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