Question

Assume an economy does not trade with the outside world. In a given fiscal year, household spent 80% of their disposable income on consumption in addition to 600 consumption expenditure which is independent of income. Total government expenditure of 900 was supposed to be financed from a proportion tax levy of 40% on national income and a lump sum tax of 450. Total private investment spending is 700. Given that aggregate output is equal to aggregate spending. Determine the value of the multiplier.

Answer 1

Since, household spendings are:

$C=600+0.8Y$

than marginal propensity to consume will be 0.8.

Than, multiplier $K=1/(1-MPC)=1/0.2=5$