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17 October, 21:06

Consider a hypothetical economy where there are no taxes and no international trade. households spend $0.80 of each additional dollar they earn and save the remaining $0.20. if there are no taxes and no international trade, the oversimplified multiplier for this economy is.

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  1. 17 October, 22:32
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    The formula for the multiplier is 1 / (1 - MPC), whereby MPC represents the marginal propensity to consume. Applying the formula to our case, we get: M (multiplier) = 1 / (1-0.8) = 1/0.2 = 5. The multiplier in this economy is therefore 5.
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