If the marginal propensity to consume (MPC) is .75 or 3/4, what is the expenditure multiplier?
Click on the arrows to vote for the correct answer
A. B. C. D.B
The expenditure multiplier is found according to the equation M= 1/(1-MPC). Thus, M = 1/(1-3/4) = 4.
To determine the expenditure multiplier, we need to use the formula:
Expenditure Multiplier = 1 / (1 - MPC)
where MPC represents the marginal propensity to consume. In this case, the MPC is given as 0.75 or 3/4.
Let's substitute this value into the formula:
Expenditure Multiplier = 1 / (1 - 0.75)
To simplify the calculation, we subtract 0.75 from 1:
Expenditure Multiplier = 1 / 0.25
Now, let's calculate the value of the expenditure multiplier:
Expenditure Multiplier = 4.0
Therefore, the correct answer is B. 4.0. The expenditure multiplier is 4.0 when the marginal propensity to consume is 0.75 or 3/4.