Q1.
Answer: $500,000
Expenditure multiplier = 1 / (1 – MPC)
= 1 / (1 – 0.8)
= 1 / 0.2
= 5
Required value of AE = Expenditure multiplier × Investment
= 5 × $100,000
= $500,000
Q2.
Answer: False
Take an example for understanding the fact.
Suppose MPC (as above) is 0.8 and MPS is 0.2; therefore, AE becomes $500,000.
Now if MPS becomes 0.4, multiplier would be (1 / 0.4 =) 2.5; therefore, AE would be (2.5 × $100,000 =) $250,000.
Conclusion: If there is more saving, multiplier and AE will decrease certainly.
ue or false. MPC+ MPS 1 o True O False Correct. Marginal propensity to consume plus...
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