In the Keynesian model, if the multiplier is 3, then ________.
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A. B. C. D. E.D
The expenditure multiplier is found by M = 1/(1-MPC). Therefore, 3= 1/(1-MPC) implies that MPC is .333)
In the Keynesian model, the multiplier refers to the impact of a change in autonomous spending on overall economic output. It represents the multiple by which the initial change in spending is magnified throughout the economy. The formula for the multiplier is given by:
Multiplier = 1 / (1 - MPC)
where MPC represents the marginal propensity to consume, which is the proportion of additional income that households choose to spend on consumption. MPS (marginal propensity to save) is the proportion of additional income that households choose to save.
Let's analyze the answer choices:
A. MPS must be approximately .30: This option suggests that the marginal propensity to save (MPS) is approximately 0.30. However, the multiplier formula does not directly involve MPS, so this answer is not correct.
B. MPC must be approximately 2/3: This option states that the marginal propensity to consume (MPC) is approximately 2/3. Let's verify if this answer is correct.
Using the multiplier formula, we can rewrite it as:
Multiplier = 1 / (1 - MPC)
Given that the multiplier is 3, we can substitute this value into the equation:
3 = 1 / (1 - MPC)
To find MPC, we can rearrange the equation:
1 - MPC = 1 / 3
Subtracting 1/3 from both sides:
-MPC = -2/3
Dividing by -1:
MPC = 2/3
Therefore, option B is correct. If the multiplier is 3 in the Keynesian model, the marginal propensity to consume (MPC) must be approximately 2/3.
C. MPC must be approximately .30: This option suggests that the MPC is approximately 0.30, but our previous calculation showed that the correct answer is approximately 2/3. Therefore, option C is incorrect.
D. MPC must be approximately 1/3: This option suggests that the MPC is approximately 1/3. However, our previous calculation indicated that the MPC is approximately 2/3. Therefore, option D is incorrect.
E. MPS must be approximately 2/3: This option suggests that the MPS is approximately 2/3. While it is true that MPS is the complement of MPC (MPS + MPC = 1), the correct answer is that MPC must be approximately 2/3, as we determined earlier. Hence, option E is incorrect.
In conclusion, the correct answer is B. If the multiplier in the Keynesian model is 3, the marginal propensity to consume (MPC) must be approximately 2/3.