For any value of the MPC (marginal propensity to consume),the formula for the expenditure multiplier is
A) 1/(1 - MPC)
B) 1/MPC
C) 1/(MPC - 1)
D) (1 + MPC)/MPC
E) 1/(1 + MPC)

Question

Quizplus · Accepted Answer

The formula for the expenditure multiplier is 1/(1 - MPC). This means that for every dollar increase in autonomous expenditure, the total increase in real GDP will be multiplied by the expenditure multiplier, which is inversely related to the MPC. For example, if the MPC is 0.8, the expenditure multiplier would be 1/(1 - 0.8) = 5, meaning that a $1 increase in autonomous expenditure would lead to a $5 increase in real GDP. Therefore, the correct choice is A.

For Any Value of the MPC (Marginal Propensity to Consume),the