Multiplier question (Q14 April 2002) - please help!

[abumenang]

Hi there, does anybody know how to solve the multiple choice question - Q13 from April 2001 (similar to Q14 April 2002)?

The question asks for the value of the simple Keynesian multiplier. It lists the Y’s (100, 120, 140) and C’s (80, 95,110) in a simple closed economy with no government sector. The answer is 4 and I’m not sure how to get this answer. Please help. Thank you.

 

[MarkC]

In a closed economy with no government, the multiplier is given by the formula

k = 1 / (1 - MPC).​

This is the first version of the formula given in Core Reading.

MPC is the marginal propensity to consume (out of disposable income). It's the proportion of each additional unit of (disposable) income that goes towards consumption.

From the figures given, we know that when (national) income increases by 20, consumption increases by 15. Dividing by 20, we see that when (national) income increases by 1, consumption increases by 0.75 - i.e.

MPC = 15/20 = 0.75.​

So the multiplier is

k = 1 / (1 - 0.75) = 4.​

I've bracketed lots of stuff out above. That's because there's no real need to distinguish between national/disposable income in this particular question. With no government, no direct taxes are taken. So national/disposable income are the same.

I hope this helps!

 

[abumenang]

Yes I see it now. Thank you very much.