Suppose there are three economies with 3 different consumption functions: Country A: C = 100 + 0.8Y Country B: C = 200 + 0.75 Y
Country C: C = 75 + 0.9Y
In which of these countries is the multiplier the largest?
A) Country A
B) Country C
C) Country B
D) All countries have the same multipliers.

Question

Quizplus · Accepted Answer

The multiplier formula is 1/(1-MPC). MPC is the marginal propensity to consume, which is the fraction of additional income that is spent on consumption. In Country B, MPC is 0.75, which is greater than the MPCs in Country A (0.8) and Country C (0.9). As MPC increases, the denominator in the multiplier formula (1-MPC) decreases, making the multiplier larger. Therefore, the multiplier is the largest in Country B.

Suppose There Are Three Economies with 3 Different Consumption Functions