Calculate the government purchases multiplier if the marginal propensity to consume equals 0.75, the tax rate...

Calculate the government purchases multiplier if the marginal propensity to consume equals 0.75, the tax rate is 0.2, and the marginal propensity to import equals 0.3.

Select one: a. 1.43 b. 1.6 c. 3.33 d. 4

Expert Solution

The marginal propensity to consume is = 0.75

The tax rate is = 0.2

The marginal propensity to import is = 0.3

Then, the government purchases multiplier can calculate with the following formula:

The multiplier = 1/[(1 - MPC) + t(MPC) + MPI]

= 1/ [(1 - .75) + .2(0.75) + 0.3]

= 1/ [.25 + .15 + .3]

= 1/ 0.7

= 1.43

Correct answer is A

Rahul Sunny answered 2 years ago

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