With a marginal propensity to consume of 0.8, what is the simple Keynesian multiplier, and what does it imply for an increase of 10 in public spending?
Answer and explanation
Correct answer: C. The multiplier is 5
- Step 1: The multiplier is 1 / (1 - c) = 1 / 0.2 = 5. Step 2. An extra 10 of spending raises income by about 5 x 10 = 50. Answer: 5 and about 50. Why not the others: the other values use c, 1/c or 1 - c instead of 1/(1 - c).
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