Scenario 34-2.The following facts apply to a small,imaginary economy.
• Consumption spending is $6,720 when income is $8,000.
• Consumption spending is $7,040 when income is $8,500.
-Refer to Scenario 34-2.The multiplier for this economy is
A)1.31.
B)6.25.
C)2.78.
D)2.27.

Question

Quizplus · Accepted Answer

The multiplier can be calculated using the formula:

Multiplier = 1 / (1 - Marginal Propensity to Consume)

where Marginal Propensity to Consume (MPC) is the change in consumption divided by the change in income.

Using the given information:

MPC = (7,040 - 6,720) / (8,500 - 8,000) = 0.32

Multiplier = 1 / (1 - 0.32) = 2.78

Therefore, the best choice is C) 2.78.