With the Consumption function: C=200+ 0.75(Y-T) and each of G, I and T being 100 what is the value of the Government purchase Multiplier?
Question
With the Consumption function:
C = 200 + 0.75(Y - T)
and each of G, I and T being 100, what is the value of the Government purchase Multiplier?
Solution
The government purchase multiplier can be calculated using the formula 1/(1-MPC), where MPC is the marginal propensity to consume.
In the given consumption function C=200+ 0.75(Y-T), the MPC is 0.75.
Step 1: Identify the MPC MPC = 0.75
Step 2: Substitute MPC into the formula Multiplier = 1/(1-MPC) = 1/(1-0.75)
Step 3: Calculate the value Multiplier = 1/0.25 = 4
So, the value of the government purchase multiplier is 4.
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