Question

If the marginal propensity to consume equals 0.90​, the tax rate equals 0.25​, what is the value of the government purchases​ multiplier? The government purchases multiplier is equal to nothing ​(enter your response rounded to two decimal places​).

Answer 1

Answer:

$GPM = \frac{1}{1-[0.9(1-0.25)-0.05]}=2.67$

Explanation:

Previous concepts

The government purchase multiplier represent the "change in income due to an increase in government spending. The amount of expansion of income depends on the value of the marginal propensity to consume"

Solution to the problem

For this case we need to use this formula:

$GPM = \frac{1}{1-[C(1-T)-I]}$

Where:

GPM= Government purchases multiplier

C= Represent the consume fraction=0.9

I= Represent the import fraction = 0.05 (Value assumed)

T= Represent the tax rate fraction=0.25

So then if we replace we got:

$GPM = \frac{1}{1-[0.9(1-0.25)-0.05]}=2.67$

And that represent the Government purchases multiplier for this case.