Could someone explain how the multiplier concept works and e
Could someone explain how the multiplier concept works and easy way to find it quickly without much calculation? Thanks!
For questions 1-7, suppose that the economy is characterized by the following behavioral equations: C = 20 + 0.8 YD, I = 30, G = 70, T = 100, X = 0 (no exports), IM = 0 (no imports).
4. The multiplier of the economy is
A. .2. B. .8. C. 1. D. 2. E. 5. F. 10.
Solution
Multiplier = 1/(1 - MPC) = 1/(1 - 0.8) = 1/0.2 = 5
MPC is the change in consumption due to change in income.
C = 20 + 0.8Y
In the equation, coefficient of Y is the MPC.
Answer is E) 5
