Assume the economy is closed and there is no government. The aggregate demand components are described below:C = 100 + 0:6Y (1)I = 200 (2)What is the mutiplier?
Question
Assume the economy is closed and there is no government. The aggregate demand components are described below:C = 100 + 0:6Y (1)I = 200 (2)What is the mutiplier?
Solution
The multiplier in an economy is calculated using the formula 1/(1-MPC), where MPC is the marginal propensity to consume.
In this case, the MPC is given as 0.6 in the consumption function C = 100 + 0.6Y.
So, the multiplier would be 1/(1-0.6) = 1/0.4 = 2.5.
Therefore, the multiplier in this economy is 2.5.
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