Suppose the price level is constant, output is demand- determined, and the economy is closed with no government. If the consumption function is C = (1/2)Y, the simple multiplier is
A)2/3.
B)1.
C)2.
D)3.
E)- insufficient information to know.

Question

Quizplus · Accepted Answer

The simple multiplier is the ratio of the change in output (Y) to the initial change in autonomous spending. In this case, autonomous spending is consumption (C). The formula for the simple multiplier is 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, the MPC is 1/2, so the simple multiplier is 1/(1-1/2) = 2.

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