Question

f a R200 billion increases in investment spending creates R200 billion of new
income in the first round of the multiplier process and R160 billion in the second
round. Calculate:
a. the marginal propensity to consume (MPC).
b. the value of the expenditure multiplier in this closed economy.

Answer 1

1. a$\Delta Y(1-MPC)=\Delta I$

200(1-MPC)=200

MPC=0

b.$M=\frac{\Delta Y}{\Delta I}=\frac{200}{200}=1$

2 a.$\Delta Y(1-MPC)=\Delta I$

160 =(1-MPC)=200

MPC=0.25

b.$M=\frac{\Delta Y}{\Delta I}=\frac{160}{200}=0.8$