Refer to the above graph for a private closed economy. The multiplier for the above economy is:
A) 2
B) 3
C) 4
D) 5

Question

Refer to the above graph for a private closed economy. The multiplier for the above economy is:
A) 2 
B) 3 
C) 4 
D) 5

Quizplus · Accepted Answer

The multiplier for a closed economy is calculated as the reciprocal of the marginal propensity to save (MPS) which is the fraction of additional income that households save instead of spending. In the graph, MPS is 1/3, therefore the multiplier is 1/(1/3) = 3. So, the correct choice is B.

Refer to the Above Graph for a Private Closed Economy