If the MPC is 0.8 and the tax rate is 20%,the expenditure multiplier will equal
A) 1.19.
B) 2.78
C) 4.0.
D) 6.0.

Question

Quizplus · Accepted Answer

The expenditure multiplier is calculated as 1/MPS or 1/(1-MPC). Since the MPC is 0.8, the MPS (Marginal saving propensity) is 0.2 (1-0.8). Then, the expenditure multiplier is 1/0.2 which equals 5. Additionally, since the tax rate is 20%, the actual expenditure multiplier will be lower by 1/ (1-MPC)t where t is the tax rate. Thus, the actual expenditure multiplier is 1/ (1-0.8)(0.2) = 2.78. Therefore, the answer is B.

If the MPC Is 0