Suppose the price level is constant, output is demand- determined, and the economy is closed with no government. If the consumption function is C = (2/3)Y, then 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 in a closed economy with no government and a constant price level is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Given C = (2/3)Y, the MPC is 2/3. Therefore, the multiplier is 1/(1-2/3) = 3.

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