Question

If 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

B. The value of the expenditure multiplier in this closed economy is:

$(200 + 160)/200 = 1.8.$

A. The Marginal propensity to consume (MPC) is:

$1/(1 - mpc) = 1.8,$

$mpc = 0.45.$