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Fact 27.5.1
The economy of Beverly Hills has a consumption function of C = 10 + 0.8Y, investment equal to 6, government expenditure equal to 10, exports equal to 10, and an import function of M = 0.1Y.
-Refer to Fact 27.5.1. What is the multiplier for this economy?
A)1.43
B)3.33
C)0.3
D)10
E)5

Question

Quizplus · Accepted Answer

The formula for the multiplier is 1/(1-MPC) where MPC is the marginal propensity to consume. In this case, MPC is 0.8. Therefore, the multiplier is 1/(1-0.8) = 5.  However, we need to also take into account the import function, which reduces the effectiveness of the multiplier. The formula for the adjusted multiplier is 1/(1-MPC+MPM) where MPM is the marginal propensity to import. In this case, MPM is 0.1. Therefore, the adjusted multiplier is 1/(1-0.8+0.1) = 3.33.

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