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17 December, 14:04

What will the multiplier be when the mps is 0, 0.4, 0.6, and 1? what will it be when the mpc is 1, 0.90, 0.67, 0.50, and 0? how much of a change in gdp will result if firms increase their level of investment by $8 billion and the mpc is 0.80? if the mpc instead is 0.67?

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  1. 17 December, 14:10
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    Multiplier = 1 / MPS

    When MPS = 0, Multiplier = 1 / 0 = Infinity

    When MPS = 0.4, Multiplier = 1 / 0.4 = 2.5

    When MPS = 0.6, Multiplier = 1 / 0.6 = 1.67

    When MPS = 1, Multiplier = 1 / 1 = 1

    MPS = 1 - MPC

    When MPC = 1, Multiplier = 1 / 1 - MPC = 1 / 1-1 = Infinity

    When MPC = 0.90, Multiplier = 1 / 1 - MPC = 1 / 1-0.90 = 10

    When MPC = 0.67, Multiplier = 1 / 1 - MPC = 1 / 1-0.67 = 3.03

    When MPC = 0, Multiplier = 1 / 1 - MPC = 1 / 1 - 0 = 1

    If MPC is 0.80, Multiplier = 1 / 1 - 0.80 = 5

    change in GDP = 5 * $8 billion = $40 billion

    If MPC is 0.67, Multiplier = 1 / 1 - 0.67 = 3.03

    change in GDP = 3.03 * $8 billion = $24.24 billion
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