Question

What will the multiplier be when the mps is 0, 0.4, 0.6, and 1? what will it be when the mpc is 1, 0.90, 0.67, 0.50, and 0? how much of a change in gdp will result if firms increase their level of investment by $8 billion and the mpc is 0.80? if the mpc instead is 0.67?

Answer 1

Multiplier = 1 / MPS

When MPS = 0 , Multiplier = 1 / 0 = Infinity

When MPS = 0.4 , Multiplier = 1 / 0.4 = 2.5

When MPS = 0.6 , Multiplier = 1 / 0.6 = 1.67

When MPS = 1 , Multiplier = 1 / 1 = 1

MPS = 1 - MPC

When MPC = 1, Multiplier = 1 / 1 - MPC = 1 / 1-1 = Infinity

When MPC = 0.90, Multiplier = 1 / 1 - MPC = 1 / 1-0.90 = 10

When MPC = 0.67, Multiplier = 1 / 1 - MPC = 1 / 1-0.67 = 3.03

When MPC = 0, Multiplier = 1 / 1 - MPC = 1 / 1 - 0 = 1

If MPC is 0.80, Multiplier = 1 / 1 - 0.80 = 5

change in GDP = 5 * $8 billion = $40 billion

If MPC is 0.67, Multiplier = 1 / 1 - 0.67 = 3.03

change in GDP = 3.03 * $8 billion = $24.24 billion