Consider a simple macro model with demand- determined output. If z is the marginal propensity to spend out of national income, Y is national income and A is autonomous expenditure, then the simple multiplier is equal to
A)Y/(1- z).
B)z.
C)1 - z.
D)1/(1- z).
E)1/z.

Question

Quizplus · Accepted Answer

The simple multiplier is equal to 1/(1- z) in a demand-determined output model. This is because a change in autonomous expenditure, A, will lead to a change in output, Y, by a multiple of the initial change, which is equal to the multiplier. The multiplier is derived from the marginal propensity to spend out of national income, z, which represents the fraction of additional income that is spent rather than saved. The formula for the multiplier is derived from the equation Y = A + zY, which can be solved for Y to find the multiplier as Y/A = 1/(1- z).

Consider a Simple Macro Model with Demand- Determined Output