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26 May, 23:05

As an elected official, you have been informed that real GDP is below its potential and that action should be taken to encourage economic growth and bring the economy to its long-run equilibrium. The marginal propensity to consume is 0.6, and the amount of new government spending is $700 billion.

What is the multiplier?

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  1. 26 May, 23:10
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    The answer is 2.5

    Explanation:

    Mpc = marginal propensity to consume

    Mps = marginal propensity to save

    Multiplier = 1 / 1-mpc = 1 / mps

    Multiplier = 1 / 1-0.6 = 1 / 0.4 = 2.5
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