Suppose the price level is constant, output is demand- determined, and the economy is closed with no government. If the saving function is S = - 100 + (0.4)Y, the simple multiplier is
A)0.2.
B)1.
C)2.5.
D)5.
E)- insufficient information to know.

Question

Quizplus · Accepted Answer

The simple multiplier is 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, MPC = 0.6, so the simple multiplier is 1/(1-0.6) = 2.5.

Suppose the Price Level Is Constant, Output Is Demand- Determined