When the marginal propensity to consume is 0.75, what will the multiplier be?
A. 1
B. 4
C. 0.25
D. 1.75
Answer (2)
The multiplier, when the marginal propensity to consume is 0.75, is 4. This means that for every $1 increase in spending, the national income will rise by $4. Therefore, the correct answer is B. 4.
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The problem provides the marginal propensity to consume (MPC) as 0.75 and asks for the multiplier.
The formula for the multiplier is M u lt i pl i er = 1 − MPC 1 .
Substituting the given MPC, we have M u lt i pl i er = 1 − 0.75 1 = 0.25 1 .
Calculating the result, the multiplier is 4 .
Explanation
Understanding the Problem The problem states that the marginal propensity to consume (MPC) is 0.75, and asks us to find the value of the multiplier.
Recalling the Formula The multiplier measures the change in national income resulting from a change in autonomous expenditure, such as investment or government spending. The formula for the multiplier is given by: M u lt i pl i er = 1 − MPC 1 where MPC is the marginal propensity to consume.
Substituting the MPC Value We are given that the MPC is 0.75. Substituting this value into the formula, we get: M u lt i pl i er = 1 − 0.75 1 = 0.25 1
Calculating the Multiplier Now, we simplify the expression: M u lt i pl i er = 0.25 1 = 4 Therefore, the multiplier is 4.
Final Answer The multiplier is 4, which means that for every $1 increase in autonomous expenditure, the national income will increase by $4.
Examples
In economics, the multiplier effect is crucial for understanding how changes in spending can impact a nation's economy. For instance, if a government increases its spending by $100 billion and the MPC is 0.75, the multiplier tells us that the actual increase in the national income will be $400 billion (4 * $100 billion). This concept is vital for policymakers when making decisions about fiscal policy, as it helps them predict the broader economic effects of their actions. Understanding the multiplier effect allows for more effective economic planning and management.
