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Fact 11.5.1
An economy has a consumption function of C = 10 + 0.8Y, investment equal to 6, government expenditure equal to 10, exports equal to 10, and an import function of M = 0.1Y.
-Refer to Fact 11.5.1.What is the multiplier for this economy?
A)5
B)0.3
C)3.33
D)1.43
E)10

Question

Quizplus · Accepted Answer

The multiplier can be calculated using the formula: 
Multiplier = 1 / (1 - (MPC + MPI + MPT + MPE))
where MPC is the marginal propensity to consume (in this case 0.8), MPI is the marginal propensity to import (0.1), MPT is the marginal propensity to tax (assumed to be zero), and MPE is the marginal propensity to export (assumed to be 1 in this case). 
Substituting the given values, we get 
Multiplier = 1 / (1 - (0.8 + 0.1 + 0 + 1)) = 1 / (1 - 1.9) = 1 / (-0.9) = 3.33. Therefore, the answer is C.

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