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Chapter 4

Question 1

Multiplier

A government injects an extra $30m of investment into the economy. In this
economy the marginal propensity to consume is 0.8. All other things being
equal, by how much will the total national income increase?

Change in national income = multiplier × change in investment

Multiplier = 1/MPS or 1/(1 – MPC)

Change in national income = 1/(1 – 0.8) × $30m

Change in national income = 5 × $30m = $150m

Illustrations and further practice

Now try TYUs 4 to 7 from Chapter 4

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