(Advanced analysis)Assume the saving schedule for a private closed economy is S = -20 + .2Y,where S is saving and Y is gross domestic product.The multiplier for this economy is:
A) 3.
B) 4.
C) 5.
D) 10.

Question

Quizplus · Accepted Answer

The multiplier formula for a private closed economy with a given saving schedule is:

Multiplier = 1 / (1 - MPC)

where MPC is the marginal propensity to consume, which is equal to 1 - MPS (marginal propensity to save).

From the given saving schedule:

S = -20 + .2Y

We have:

MPS = 0.2

Therefore:

MPC = 1 - MPS = 0.8

And:

Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 5

Therefore, the multiplier for this economy is 5.

(Advanced Analysis)Assume the Saving Schedule for a Private Closed Economy