Answer to Question #308498 in Macroeconomics for Jackey

Question

The value of the multiplier (K) depends on factors such as the marginal propensity to save (MPS), the marginal propensity to import (MPX) and the marginal ta rate (MTR). The value of the multiplier is, therefore, in practice between the values of 1 and 2. True or False

Answer 1

False. in an open economy, the value of the multiplier depends on factors such as marginal propensity to save, marginal propensity to import and the marginal tax rate. In practice, the size of the multiplier is always determined by what proportion of the marginal dollar of income goes into leakages - savings, imports and taxes. These 3 factors determine how much demand leaks out in each round of the multiplier effect. Changes in the size of leakages in a given economy are what determines the multiplier value.