Consider a simple macro model with demand-determined output and the following specific parameter values:
A. Marginal propensity to consume out of disposable income = 0.6
B. Marginal propensity to consume out of national income = 0.48
C. Marginal propensity to import = 0.23
The simple multiplier without government and foreign trade in this economy is and the simple multiplier with government and foreign trade in this economy is .
A) 1.67; 1.33
B) 1.67; 4
C) 2.5; 1.33
D) 2.5; 2.5
E) 2.5; 4

Question

Quizplus · Accepted Answer

The simple multiplier without government and foreign trade can be calculated using the formula:

Simple multiplier = 1 / (1 - MPC)

where MPC is the marginal propensity to consume out of national income, which is given as 0.48

Therefore, simple multiplier = 1 / (1 - 0.48) = 1 / 0.52 = 1.92 ≈ 2.5

The simple multiplier with government and foreign trade can be calculated using the formula:

Simple multiplier = 1 / (1 - MPC + MPI - MPT)

where MPI is the marginal propensity to import, which is given as 0.23, and MPT is the marginal propensity to tax, which is not given in the question.

Since the question only provides the value of MPI, we can assume that MPT is zero for simplicity.

Therefore, simple multiplier = 1 / (1 - 0.48 + 0.23 - 0) = 1 / 0.75 = 1.33

Thus, the best choice is C, with a simple multiplier without government and foreign trade of 2.5 and a simple multiplier with government and foreign trade of 1.33.

Consider a Simple Macro Model with Demand-Determined Output and the Following