Question

You are given the following information about a closed economy with no government: Consumption = 115 + 0.6Y Investment = 550 Use the above information to answer the questions that follow:
Q.4.2 Calculate the value of the multiplier

Answer 1

Solution:

The value of the multiplier = $\frac{1}{(1-MPC) }$

MPC = $\frac{Change \;in \;Consumption\;(C) }{Change\;in \;Income(Y) }$

$Y = C+I$

$Y = 115+0.6Y+550$

$Y = 115+550+0.6Y$

$Y = 665+0.6Y$

$Y-0.6Y=665$

$0.4Y=665$

$Y=\frac{665}{0.4}$

$Y = 1663$

$C=115+0.6Y$

$C=115+0.6(1663)$

$C=115+998$

$C=1113$

$MPC=\frac{1113}{1663}$ = $0.7$

$Multiplier =\frac{1}{(1-MPC) }$

$Multiplier =\frac{1}{(1-0.7) }$

$Multiplier = \frac{1}{0.3}$

$Value\;of \;the\; multiplier = 3.33$